Four Things You Need to Know If You Have Student Loans and Live in Wisconsin

Wisconsin is one of the best places to live if you have student loans.

March 2nd, 2020 | 8 min read

Paying down your student loans can feel like such a burden. For many, you have to make a choice between backbreaking monthly payments or living under the weight of them for what feels like forever. It’s a horrible feeling, and an unfortunate situation I find so many people in today.

But did you know, for those with student loans, especially on income driven repayment plans, Wisconsin is one of the best states you can live in?

It’s true! Here are several ways your Wisconsin residency can help you pay a lot less than you thought you could to your student loans.

(Caveat: The beginning of this discussion centers around paying your loans utilizing income-driven repayment plans. If this doesn’t apply to you, skip down to sections 3 & 4 on Wisconsin’s cost of living advantage or the Health Professions Loan Assistance Program if you are a medical professional.)

#1: Wisconsin’s status as a community property state

The first, and perhaps most important, key to this is that Wisconsin is a community property state. There are a total of nine community property states in the U.S. and Wisconsin is among them.

Source: Wikipedia

If you look at a map of community property states, you find that the bulk of them are out west. And then you have Wisconsin, its own community property island paradise in the midwest. I’m not sure you would put Wisconsin in the same sentence as, “island paradise,” but hey, that’s what it is in this case.

If you live in Wisconsin and are making student loan payments based on your income, you are likely leaving a lot of extra money on the table by not utilizing this to your advantage.

Married filers: what’s the deal between filing my taxes jointly vs. separately?

For some quick context, if you are married and file taxes jointly, you must include your total household income (as in AGI on your tax return) to calculate your monthly payment on an income-driven repayment plan. By definition, this pulls your spouse’s income into the equation. However, most of the income-driven repayment plans allow you to include just your income if you file your taxes under married filing separately status.

The significance of this is that you may have lower student loan payments if you file taxes separately, especially if your partner doesn’t have student loans.

Enter the community property state rules for how you calculate income on your tax return. When you file taxes separately in a community property state, you count half of your income and half of your spouse’s income on each separate return.

Example: Becky is a radiologist earning $250,000 annually and her husband Will is a teacher earning $40,000 annually. If Becky and Will file their taxes jointly, they will show $290,000 of income on their taxes.

But! If they file their taxes separately, under community property laws, we would take half of Becky’s income ($125,000) and half of Will’s income ($20,000) for both separate returns. This leaves us with Becky showing $145,000 in income and Will showing $145,000 in income.

If Becky is the one with student loans and is paying them via an income-driven plan, then this effectively lowers Becky’s income from $250,000 to $145,000, a difference of $105,000! Depending on her repayment plan, this represents savings of over $10,000 per year.

Community property key #1: reducing the breadwinner’s income

So…the first key with the community property rules is that if you are the one earning more income, you can file your taxes separately to SIGNIFICANTLY reduce your AGI (adjusted gross income), and therefore, your student loan payments.

But Erik, you ask, what if I’m the one in the relationship with the lower income and have the student loans?

Community property key #2: using the lower-earning spouse’s income

Here is the second key to filing your taxes separately in a community property state. When you are applying for an income-driven repayment plan, you don’t have to use the tax return to show your income. You can use your paycheck, or an alternative documentation of your income from your employer, to calculate your payment.

So, if we’re using the example from above, let’s say Will is now the one with the student loans. They can still file their taxes separately, so they don’t have to include Becky’s income, but instead of using the tax return, Will can use his paycheck, which would show only $40,000 of annual income….MUCH lower than the $145,000 he would have to show if he used the tax return to calculate his loan payment!

So, if you are paying your student loans on an income-driven repayment plan, you can get the best of both worlds if you live in a community property state, like Wisconsin!

#2: Filing taxes separately on the Federal return, but jointly for Wisconsin

I have taken you through the process of how to (significantly) lower your student loan payments by filing taxes separately if you are married. One drawback to this technique, though, is that by filing taxes separately, you are often left with a higher tax bill than if you filed a joint return.

What we don’t want to do is rob Peter to pay Paul. If you decrease your student loan payments, but increase your tax bill by the same amount, you haven’t really done anything to make your situation better. This is not the goal!

What we want to have happen is to lower your student loan payments by a lot more than the increase to your tax bill from filing separately.

The nice thing is that we have ample opportunity to make this work. On the federal side, there are some tax credits you lose out on when filing separately (student loan interest deduction, earned income tax credit, others), so you want to be mindful of these. However, because of how income is allocated in community property states, the difference that I generally see between separate vs. joint returns isn’t that great.

The kicker, though, is that you don’t even have to worry about the separate vs joint filing difference on the Wisconsin tax return. Why? Wisconsin allows you to file a joint state return even if you file separate federal returns, which is the second key of paying down your student loans if you live in Wisconsin.

Wisconsin Department of Revenue’s Publication 109 provides guidance on this. For some quick context, a tax publication is an official document that provides detailed guidance on tax issues. Wisconsin’s Pub 109 is on “Married Persons Filing Separate Returns and Persons Divorced in 2019.” I know, this is riveting stuff. The important takeaway here though, is that it explicitly states “…you may file a joint Wisconsin return even though you file separate federal returns.”

Bingo! No need to take a tax hit on the state return by filing separately. Since we are able to file a joint Wisconsin return regardless of what we do on the Federal return, we have now simplified our equation.

#3: Wisconsin’s cost of living advantage

The advantage here is Wisconsin’s relatively low cost of living, when compared with many other places in the U.S.

As a state, Wisconsin ranks below average in cost of living. And if you look at the largest city, Milwaukee, it ranks 22nd out of the 75 most populous cities in America for cost of living.

(source: https://www.move.org/lowest-cost-of-living-by-us-city/)

What this means for you is, there are less dollars needed for necessities like food and shelter, leaving you with more dollars in your pocket to pay down your debt further or enjoy life! Just another perk of living in the beautiful state of Wisconsin!

#4: Utilizing Wisconsin’s state-specific loan assistance programs

Up to this point, most of the discussion focuses on using the federal student loan rules in concert with Wisconsin’s tax rules to lower your student loan payments. But there are actually other programs out there that can help you with your student loans.

Wisconsin offers two programs, totalling up to $100,000 in potential loan assistance. These are the Health Professions Loan Assistance Program (HPLAP) and the Rural Physician Loan Assistance Program (RPLAP).

Each program offers $50,000 a piece in loan assistance. If you meet certain criteria, these programs can offer significant help in paying down your loans.

For the HPLAP, you must be in one of the following professions:

Physician
Psychiatrist
Dentist
Dental hygienist
Physician assistant
Nurse practitioner
Certified nurse midwife

Physicians, psychiatrists, and dentists can receive up to $50,000 in total assistance, while dental hygienists, physician assistants, nurse practitioners and certified nurse midwives can receive up to $25,000. The awards are paid out equally over three years.

If you are in a qualifying profession, you must also agree to work full time for 3 years in an underserved area, as defined by the federal Health Resources and Services Administration’s designated health professional shortage areas (HPSA). You can see the status of a specific site or area here: https://data.hrsa.gov/tools/shortage-area/hpsa-find.

For the RPLAP, qualifying professions are narrowed down to primary care physicians and psychiatrists. This also requires a three year commitment, but to a site in a rural area, as the program’s name suggests. This is defined as:

“A city, town, or village that has a population of less than 20,000 and that is at least 15 miles from any city, town, or village that has a population of at least 20,000, and
That is not an urbanized area, as defined by the federal bureau of the census.”

If you are a physician or psychiatrist, you can apply to both programs if you are eligible and receive up to $100,000. You can find even more details at the Wisconsin Office of Rural Health’s website.

While there are quite a few hoops to jump through with these two loan assistance programs, I have seen some become eligible to receive awards. One of the hang-ups is the location of the site you work at, but these aren’t always intuitive, so it helps to check out the HPSA site and look at where you work to make sure. And, as you can see, the potential loan assistance can be quite significant.

Overall, there are a lot of factors to consider when paying down your loans. What I’ve shared are specific to the state of Wisconsin, but there are quite a few other factors to take into account, too.

I would love to hear what you think about this. Have you used any of these strategies? Or are you thinking about using one of these strategies? Reach out and let me know!

Erik Kroll is a Fee- Only Fiduciary Financial Planner in Milwaukee, Wisconsin. His mission is to help people across their whole financial picture. With a specialization in student loans, he has advised on over $5 million in student debt.

Erik is always on the journey of being a better father, husband, and listener.