Although moving abroad is the adventure of a lifetime, it’s crucial to comprehend the effects on expats if you have student loans.
To ensure that you don’t miss any payments, for instance, it’s a good idea to set up autopay (some loan servicers even offer a small discount for this). You should also make sure that, if your salary is paid into a foreign bank once you move abroad, you can easily transfer payments to your US bank so that you don’t miss any payments.
Before you relocate abroad, you might need to open an account at a US bank in the country where you plan to live. (CitiBank and Chase have branches around the world. ).
It’s crucial to avoid defaulting on your student loans while you’re away from home because doing so would damage your credit score, which would later affect your ability to obtain credit or purchase a home.
Before you move abroad, you should also think about whether it would be worthwhile to consolidate your student loans, as this could lower your monthly payments. Or, if you’re having trouble making your payments, you might think about switching to an income-based repayment plan.
Having an income-based repayment plan for your student loans and utilizing the Foreign Earned Income Exclusion if you’re moving abroad to work could possibly result in a monthly payment reduction to zero.
The Foreign Earned Income Exclusion
Despite the fact that US citizens and holders of green cards must still file their taxes from abroad, thankfully there are some exceptions that lower (or, for the majority of expats, completely eliminate) their US tax obligations.
Particularly, the Foreign Earned Income Exclusion permits expats to avoid paying US tax on approximately $100,000 of their income if they can demonstrate that they live abroad in one of two ways.
Expats must demonstrate one of two things in order to be eligible: either they spent at least 330 days outside the US in a 365-day period that coincides with the tax year, or they are a permanent resident of another nation.
Expats must submit Form 2555 along with their US tax return in order to claim the Foreign Earned Income Exclusion.
The impact of the Foreign Earned Income Exclusion on income-based student loan repayment plans
The interesting thing about the Foreign Earned Income Exclusion for expats with an income-based student loan repayment program is that if they use it, their Adjusted Gross Income will be reduced to zero if they earn less than the FEIE threshold (roughly $100,000) and have no other income. Therefore, they would also have zero monthly payments (which are determined as a percentage of their reported Adjusted Gross Income).
If their Adjusted Gross Income changes, expats should check with their student loan servicer to see how that might affect their repayment options.
At first glance, it might seem like a great idea to reduce payments in this manner, but there are long-term effects to take into account.
For instance, if you don’t make your monthly payments, interest will continue to accrue, which could result in you owing more money in the future.
However, for expats with an income-based student loan who settle abroad permanently, this can be a way to effectively write off the whole loan, as if they are earning under $100,000, they will end up paying nothing until the loan is forgiven. They can actually earn a little over $100,000, as income-based repayments are actually calculated as a percentage of the difference between 150% of the poverty level and your Adjusted Gross Income for the whole term of the loan (normally 20 or 25 years).
This could be a risky tactic, though, as it can be difficult to predict how your income and place of residence will change over the course of so many years. Additionally, if you don’t qualify for this repayment option in the future, the loan might not be completely forgiven.
If the loan is eventually forgiven though, the total value of the loan and the interest accrued is considered income, so there will be a one-off hit for income tax (and since it’s not earned income, it can’t be excluded using the Foreign Earned Income Exclusion). While the value of the income tax owed will be much less than the total value of the loan and interest, the entire tax will be due and payable in one tax year and it may push you into a higher tax bracket for that year.
Additionally, during these years, you would probably be better off not choosing to file jointly if you are married to a foreigner who is also an earner.
Therefore, having an income-based repayment plan for student loans may be a practical way for expats to postpone payments or, if they decide to live abroad permanently, completely write off their student debt.
However, we strongly advise expats to check their loan provider’s repayment terms to see if this is feasible.
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FAQ
Do you have to pay US student loans if you live abroad?
You carry over your federal and private student loans from the US to your new country. Moving overseas doesn’t remove your responsibility for the loan. You will continue to be required to make payments each month to the Department of Education and your private lenders.
Are foreign student loans tax deductible?
Form 1098-E is a US form. You can still claim the deduction on your tax return even though you won’t receive this form from a foreign lender. What is this? The amount of interest paid for the qualified student loan is what qualifies as the deduction for interest paid to a foreign lender.
Can Expats get student loan forgiveness?
If an expat who earns more than $125,000 uses the FEIE to lower their income by over $100,000, they may be eligible for up to $20,000 in student loan forgiveness. An illustration of how this might transpire is as follows: Bill resides and works in The Netherlands. He earns a salary of roughly $130,000 per year.
Can you renounce US citizenship if you have student loans?
Yes, the State Department cannot prevent you from renunciating your citizenship because of a private debt (which is none of their business), nor can they prevent you from renunciating because of a tax debt. However, renouncing citizenship does not cancel any debts you owe.