How Working Abroad Could Reduce Your Student Loan Payments to $0

working abroad with student loans

“I love encouraging students and recent grads to travel and live overseas,” said Amanda Walkins, a freelance writer who has lived abroad for the past five years. “Student loans shouldn’t stop you from following your dreams.”

If you graduated with student loans, you might feel like living in another country is out of reach. But there’s a secret strategy that makes working abroad with federal student loans more manageable.

Here’s the trick: By earning foreign income and switching to an income-driven repayment plan, you could reduce your student loan payments to $0.

Although there are some downsides to this approach, halting your loan payments could free you to explore the world. You could teach English in Argentina or motorbike through Vietnam, all thanks to an income-driven repayment plan.

How income-driven repayment plans work

The government offers four income-driven repayment plans to borrowers with federal student loans: Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR).

All four plans adjust your monthly student loan payments based on your income. On IBR, for instance, you’ll likely pay 10 percent of your discretionary income if you took out loans after July 1, 2014. If your loans predate July 1, 2014, you’ll pay up to 15 percent.

The other three plans also limit your monthly payments to between 10 and 20 percent of your income. Like IBR, PAYE and REPAYE offer the lowest cap at 10 percent of your discretionary income. ICR has the highest limit, at 20 percent.

These plans also extend your repayment period to 20 or 25 years. If you still have a balance after all that time, the government will forgive your remaining balance. Keep in mind, however, that the forgiven debt will be taxed as income for that year.

Pay $0 toward your student loans while working abroad

What happens to your payments if you’re working abroad with federal student loans?

All income-driven plans adjust your student loan payments based on your income. “Payments under an income-driven plan are calculated using whatever income documentation you provide,” said student loan lawyer Adam Minsky.

Many people use their federal tax return to offer proof of income. Then, the government adjusts your student loan payments according to your adjusted gross income, or AGI. Your AGI is the amount of money you make that’s subject to income tax.

Here’s where the secret to overseas student loan repayment comes in. If you’re making money in another country, your AGI could be $0. In other words, you may not have any taxable income to report when you apply for an income-driven plan.

“A certain amount of foreign income can be excluded from your AGI to avoid double taxation,” said Minsky. “The AGI could be lower than it otherwise would be if you were working in the U.S.”

The amount you can exclude varies from year to year based on inflation, but it’s typically around $100,000. If you’re making $100,000 or less from a foreign employer, you may not have to pay any U.S. income taxes at all.

And if your AGI is $0, your student loan payments on an income-driven plan could also go down to zero. Whatever plan you’re on, 10, 15, or 20 percent of $0 is still $0.

Normally, paying nothing each month toward your student loans would cause you to go into default. But if you get on an income-driven repayment plan, you can — at least temporarily — say goodbye to student loan payments while you live and make money abroad.

Remember that interest will keep adding up

While reducing your student loan payments can be a godsend, it also has a major drawback. By paying little or nothing each month toward your student loans, you won’t be making a dent in your debt at all.

Day after day, interest will keep accruing on your loans and your total balance will grow. If you move back home and start making bigger payments, you could be paying off interest for a long time before even touching the principal.

“Interest continues to accrue, even while you remain in good standing with a low or $0 payment,” warned Minsky. “This can make paying back the loan more difficult in the future if your circumstances change.”

It’s tempting to minimize your student loan repayment while overseas. But you also need to consider the long-term consequences. You could end up facing a mountain of student debt if and when you decide to move back home.

Prepare for a tax bill if your loans are forgiven

After 20 or 25 years on an income-driven repayment plan, the government forgives any remaining federal student loan debt you have. If you’re an expat all this time, you could get loan forgiveness on your entire balance.

But you won’t be able to escape your student loans entirely. This kind of federal loan forgiveness is typically considered taxable income.

“If the forgiven amount is treated as taxable income, it could increase the resulting tax bill,” said Minsky. So if the government forgives a large amount of debt, you might have to pay thousands of dollars in taxes.

Of course, these taxes might still pale in comparison to your debt. But be prepared for this last bill before you’re free of your student loans.

Weigh the pros and cons of working abroad with student loans

If you’re dying to work abroad, student loans don’t have to hold you back. On an income-driven repayment plan, you can lower your payments while avoiding default.

“A low or $0 payment under an income-driven plan can make student loan repayment quite affordable while living abroad,” said Minsky, “and it also puts you on track for eventual loan forgiveness.”

But be mindful of the drawbacks of this approach. “Your balance may grow substantially over time,” warned Minsky. Plus, the government’s treatment of foreign-earned income could change in the future.

Before taking the leap of working abroad with student loans, weigh the short- and long-term consequences of your decision. And of course, don’t simply ignore your debt when you go abroad, as it will be waiting for you when you return home.

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