If you graduated with student loans, you might feel like living overseas is out of reach. Or you might be tempted to try to escape debt by leaving the country. But you should know that there’s a strategy that makes working abroad with federal student loans more manageable.
Here’s the trick to possibly not paying student loans living abroad: By earning foreign income and switching to an income-driven repayment plan, you could reduce your federal student loan payments to $0 per month. If you can keep this going long enough and if tax laws don’t change, you might even get your entire balance forgiven.
Although there are downsides to this approach — including ballooning interest on your loans and the fact that private loans aren’t affected — halting federal loan payments could free you to explore the world for a period of time. You could teach English in Argentina or motorbike through Vietnam, all thanks to an income-driven repayment plan.
Not paying student loans while living abroad: Income-driven repayment 101
In order to understand how to avoid paying student loans while living abroad, you first need to understand income-driven student loan repayment plans.
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 the IBR plan, for instance, you’ll pay 10% of your discretionary income if you took out loans after July 1, 2014. If your loans predate July 1, 2014, you’ll pay 15%.
The other three plans also limit your monthly payments to between 10% and 20% of your income. Like the IBR plan, PAYE and REPAYE offer the lowest cap, at 10% of discretionary income. ICR has the highest limit, at 20%. The best plan for you depends on what year you took out loans and what type of loans you have. Explore your options using the federal government’s Repayment Estimator tool.
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. The forgiven debt will likely be taxed as income for that year, however.
How an income-driven plan could mean $0 loan payments
All four 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 Adam Minsky, a Boston-based student loan lawyer.
Many people use their federal tax return to offer proof of income. The government then 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 earning money in another country, your AGI in the United States could be $0. In other words, you may not have any taxable income to report on your U.S. federal tax return when you apply for an income-driven plan. The foreign earned income exclusion is one way people get their AGI down to $0 while living abroad.
“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 of earnings you can exclude varies from year to year based on inflation, but it’s typically around $100,000. For the 2019 tax year, the maximum amount allowed to be excluded under the foreign earned income exclusion is $105,900. If you’re making less than that 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 $0. Whatever plan you’re on, 10%, 15% or 20% 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 and live overseas, you can — at least temporarily — say goodbye to student loan payments while you make money abroad.
Remember that interest will keep adding up
While it might feel like you can escape debt by leaving the country and using an income-driven repayment plan, your student loans won’t simply disappear. Lowering your student loan payments can be a temporary benefit and can keep your loans in good standing, but it also has a major drawback. By paying little or nothing each month toward your student loans, you won’t be reducing your debt at all.
What’s more, interest will keep accruing on your loans and your total balance will grow. If you return to the U.S. and start making regular payments, you could be paying off interest for a long time before even making a dent in the principal amount.
It’s tempting to minimize your student loan repayment while overseas. But know that not paying student loans while living abroad can have long-term consequences. You could end up facing massive student debt when you return home.
Getting loan forgiveness doesn’t mean paying $0
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 those years, you might be able to get loan forgiveness on your entire balance if you qualify to pay $0 monthly loan payments. But you won’t be able to entirely escape your student loans by leaving the country.
For starters, it isn’t easy to claim the Foreign Earned Income Exclusion — claiming it for 20 or 25 years straight is certainly a challenge. You’d have to remain outside of the U.S. for 330 days out of any consecutive 12-month period in order to claim the exclusion each year, which can prove difficult if an emergency arises and requires you to return home.
Plus, if your income eventually surpasses the maximum amount you’re allowed to exclude, which is $105,900 for the 2019 tax year, you’ll have to report an AGI on your federal taxes and have to start making payments on your student loans. You’d also be relying on the IRS to not make any changes to these tax laws that would increase your AGI for the next 20 to 25 years.
In addition, this kind of federal loan forgiveness is also considered taxable income. If the government forgives a large amount of debt, that could mean thousands of dollars in federal taxes on the forgiven amount.
Of course, these taxes might pale in comparison to your total 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 eager 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.
But be mindful of the drawbacks of not paying student loans while living abroad. “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 to work abroad with student loans, weigh the short- and long-term consequences of your decision. And, of course, don’t fully ignore your debt when you go abroad: It will be waiting for you when you return home.
Elizabeth Aldrich contributed to this report.