When we think of two young professionals married to each other, we think that these two people have nothing in the world economically to worry about. Unfortunately, for most professionals coming out of their respective graduate schools, the reality can be quite different.
The reality is student loan debt with interest rates that are running at 8% and higher. Graduate school student loans may total between $100,000 and $300,000 per individual, while at the same time these individuals must deal with a sour economy and diminished job and income expectations.
Consider, as a case study, a professional couple living in a middle class community in Pennsylvania. The wife is a physician in her first year of residency, working for one of the larger hospital systems and her husband is a lawyer working for a small company. Both are earning an income, which is not always assured in today’s economy.
The physician works approximately 95 hours a week. Her first year salary is $48,000, which in her second year will increase to $49,500. She receives medical, dental and vision care insurance from the hospital, which covers her and her husband.
Her husband works approximately the same amount of hours in a month as she does in one week. He earns approximately $37,000 a year. He does not receive medical, dental, or vision insurance. Because he is an independent contractor rather than an employee of the company for which he performs work, his wages are reported as IRS Form 1099 income for “sole proprietors”. For purposes of federal and state taxation, an independent contractor is responsible for paying both the employer’s and the wage earner’s halves of the Social Security and Medicare taxes.
This raises the husband’s Social Security tax liability from 6.2% to 12.4% and the Medicare tax liability from 1.450% and 2.9%, because he is “self employed”. In effect, he has required “payroll taxes” of 15.3% of income, rather than the 7.65% that “wage earners” pay. Even though there is a ceiling on the amount of income taxed for social security (well above the lawyer’s present income), the Medicare tax is assessed against all earned payroll income.
Although the professional couple earns $85,000 before tax, tax credits and any deductions, when one factors in the costs of servicing their student debt, the couple’s income picture is much less adequate than it might initially seem.
Before breaking down where the $85,000 household income is spent, a discussion of how the student loans were incurred is in order.
Each attended a state university, and either through scholarship or an educational fund, they both managed to graduate without any undergraduate student loans (although many of their graduate school classmates had amassed sizable student debt as undergraduates) . But neither was able to pay the costs of medical or law school.
Her debt student debt load totalled $167,000 for tuition alone, with an additional $36,000 in loans for her living expenses for the four years of medical school. Medical and law school students do not have time to work on anything other than their studies, so any income from odd jobs while in these or most professional graduate degree program is not an option. His student loans totaled $136,000 for both tuition and living expenses for a year of graduate school and three years of law school.
There are currently a variety of government sponsored student loan repayment schemes. But with regards to our couple what is only relevant is she is in a hardship deferment, meaning that she is making no payments on her debt (even though its interest is compounding). His repayment is currently capped at 15% of his AGI (Adjusted Gross Income, the amount of income on which he owes taxes).
The lawyer’s payments just after graduation were costing $1250 a month. However, with his low current income, the repayment rate has been adjusted to $460 a month. But, since this couple recently married, his student loans will now increase to 15% of the couple’s total income increasing his payment amount to $920. (After 30 years of making regular monthly payments, any outstanding debt is forgiven.)
Both professionals have cars. His car payment is $385 a month, while her payment is $350 a month. Both vehicles get over 32 MPG average. Because they live near her residency program, between them they spend less than $100 a month on fuel. Their combined cost for both their automobile and homeowner’s insurance is approximately $190 a month.
Given that the couple knew her residency would be 3-4 years and that the housing market was priced at the lowest levels in 10 years, the couple decided to purchase a townhouse. Their fixed mortgage payment is $1330 a month, less than cost of renting in the same community.
Let’s examine the income and expenditure flows for the couple. First, before AGI, the couple’s gross income is estimated at $85,000, which would place them in the 28% IRS tax bracket. Given that the top of the 25% tax bracket is $82,000 and that the couple will get at least their standard deduction of $11,400, we calculate their tax rate at 25% for federal taxes. However, the federal tax rate does not include their social security taxes.
Taking the $48,000 amount, the physician will be paying $3,672 in SSI, while her husband will be paying $5,661, based off his $37,000 income.
hershisBase Income48,00037,000SSI Taxes3,6725,661Net44,32831,339
After withholding and estimated taxes, this leaves the following amounts:
|post SSI tax||$44,328||$31,339|
|25% federal tax rate||$12,000||$9,250|
This leaves the following after federal tax amounts for their monthly budgets:
|Monthly income after income tax||$2861||$1841|
|Student loan payment||0* (deferred)||$460|
Housing expenses (mortgage and Insurance), car insurance, car payments, etc.
|After tax income||$2861||$1381|
*This does not cover property taxes, Pennsylvania’s township taxes or state income taxes. State and local taxes vary by state and even township in commonwealth states like Pennsylvania. As these taxes can change widely even from year to year , so that it is hard to estimate these tax liabilities accurately.
**the cell phone plan covers both data, and 700 shared minutes plus roll over.
The couple’s net income, after the living expenses, student loans and federal taxes is $1,014 a month or $12,168 annually from which the local property assessments and any state income tax will be made. In this particular example those annual local and state assessments total $3250, leaving only $8,918 ($743 monthly) for the couple’s discretionary income prior to their marriage.
Because the husband and wife’s income are now aggregated, the husband’s student loans, although still capped at 15% of monthly income, have now doubled, as a result of the joint income. The discretionary income that was used for the likes of dining out, clothing, adult beverages, gym memberships, professional association memberships, movies, movie rentals, have now been reduced further by the doubling of his student loan payments from 460 to $920, leaving $283 a month. This razor-thin amount of discretionary income, makes savings or expenditures on such items as household furnishings (which would benefit the local community) impossible.
The reason why there is any residual income at all in this example is that the physician, who is in residency, has her loans deferred until she graduates from the residency program. When she finishes her residency and is practicing in her specialty, she would expect a sizable increase in income, but with that increase monthly payments on HER loans must commence and the amount her husband is required to pay on his loans must increase to reflect the increase in their joint income.
For this example, assume his income and their living expenses remain the same, but that her income and their loan obligations increase (i.e., any increase in their aggregate income, regardless of whose income increases, bumps up the amount of each person’s loan subject to the 15% loan payment cap). The starting salary in her field is approximately $175,000 annually depending on location.
|28% tax rate*||$49,000|
*SSI taxes capped at $108,000; income tax rate based on 2010 rates, filing jointly.
A hypothetical monthly budget once she has entered practice might be as follows.
|monthly after tax income||$9,730|
|15% student loan cap||$2,188|
|His student loan||$1,220|
Of course these numbers are only estimates and have not been fully calculated for deductions. These are only intended for the purpose of showing the raw data that married professionals have to go through. Each decision made will change the raw numbers. For example once physicians graduate from their residency programs, they tend to move to a new location, which means a new home or a new apartment. Depending on the circumstances, this will reduce or increase discretionary income.
Although the after tax income might in other circumstances be regarded as a reasonable income, the crush of debt impacts the economic situation of the young professionals who experience it. While physicians still are any demand, for many professionals the projected increases in salaries will quite probably not be seen.
There likely has been no comparable time when so many professional couples have started their careers with such a high aggregate debt load for repaying and servicing their student debt. The impact of these debt levels is poorly understood. Some of the consequences may be foreseen, such as a continued avoidance by physicians of geographical areas and specialties thought to offer lower remuneration. Other unforeseen but likely perverse, consequences may well emerge.