FEIE For U.S. Expats With Student Loans

Moving abroad is the adventure of a lifetime, but if you have student loans it’s important to understand the consequences for expats.

For example, it’s a good idea to set up autopay (some loan servicers even offer a small discount for this) to ensure that you don’t miss any payments, and also to ensure that if your salary will be paid into a foreign bank once you move abroad you can easily transfer payments to your U.S. bank so that you don’t miss any payments.

This may mean opening an account at a U.S. bank with a location where you’re moving to before you move abroad. (CitiBank and Chase have branches around the world.)

It’s important not to default on your student loans while you’re abroad, as this would affect your credit score, which in turn would affect your ability to get credit or buy a house later on.

Another important consideration is whether it’s worth refinancing multiple student loans before you move abroad, as this could reduce your monthly payments, or, if you’re struggling with repayments, you could consider moving to an income based repayment plan.

If you’re moving abroad to work, having an income based student loan repayment plan and claiming the Foreign Earned Income Exclusion could potentially reduce your monthly payments to zero.

The Foreign Earned Income Exclusion

U.S. citizens and green card holders are still required to file U.S. taxes from abroad, however thankfully there are some exclusions which reduce or for most expats eliminate their U.S. tax liability.

In particular, the Foreign Earned Income Exclusion lets expats who can prove that they live abroad in one of two ways not pay U.S. tax on the first around $100,000 of their income.

To qualify, expats must prove either that they spent at least 330 days outside the U.S. in a 365 day period that’s either the tax year or that coincides with the tax year, or prove that they are a permanent resident in another country.

To claim the Foreign Earned Income Exclusion, expats have to file form 2555 with their U.S. tax return.

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 who have an income based student loan repayment program is that if they earn less than the Foreign Earned Income Exclusion threshold (around $100,000), their Adjusted Gross Income is zero, so their monthly repayments (which are calculated as a percentage of their declared Adjusted Gross Income) would also be zero.

This may seem like a great idea at first glance, however there are consequences in the longer term to be considered.

For example, if you aren’t making monthly repayments, interest will keep accruing, leaving you with more to pay back later.

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 (or a little over in fact, 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), they will end up paying nothing until the loan is forgiven.

When the loan is 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 as it’s not earned income, it can’t be excluded using the Foreign Earned Income Exclusion), however the value of the income tax owed will be much less than the total value of the loan and interest.

Also, during these years, if you’re married to a foreigner who is also earning, you would probably be better off electing not to file jointly.

So having an income based student loan repayment plan may be a useful way for expats to delay payments, or, if they settled abroad permanently write off their student loan entirely.

With clients in over 150 countries, Bright!Tax is a leading provider of US tax services to the estimated 9 million Americans living abroad. I’m responsible for client experience, communications, and branding. Since I joined, turnover has been growing at a rate of 80% per annum.

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