“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.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.47% APR (with Auto Pay) to 7.59% APR (with Auto Pay). Variable rate loan rates range from 2.27% APR (with Auto Pay) to 6.89% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of August 15, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/15/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for SoFi.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.37% effective July 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.27% – 6.89%1||Undergrad & Graduate|
|2.27% – 7.75%2||Undergrad & Graduate|
|2.43% – 6.65%3||Undergrad & Graduate|
|2.24% – 6.67%4||Undergrad & Graduate|
|2.37% – 7.95%5||Undergrad & Graduate|
|2.46% – 9.24%6||Undergrad & Graduate|