Thinking of moving overseas to avoid student loans? You’re not alone. We have many clients in New Zealand, Australia, Europe, the Middle East and Asia who are legally paying $0 a month on their federal student loans. They’re not committing tax fraud or in default, and they’re going to have a huge amount of debt forgiven if they continue their strategy.
Their stories are all different. Some left the U.S. after marrying husbands or wives from another country while traveling or studying abroad. Others thought the international move would be temporary, but then these folks adopted a permanent expat lifestyle due to a lower cost of living.
You don’t have to flee the country or escape to get away from student loans. Some student loan borrowers use forbearance for years until loan servicers start getting creative with collection methods. Others send random statements from international employers showing paystubs. The shrewdest hire a CPA to file their U.S. taxes showing Adjusted Gross Income (AGI) of $0.
Having an AGI of $0 and having your federal loans on an income-driven repayment plan (IDR) like Pay As You Earn (PAYE) can effectively mean paying nothing on your student loans.
On various Reddit channels and Facebook groups, you can find people talking about this little-known hack. Read on to learn why moving overseas to avoid student loans can be beneficial.
Why living abroad is so good for your student loans
The biggest hack you probably don’t know about your student loans is something called the Foreign Earned Income Tax Exclusion. You can exclude over $100,000 of income earned abroad from your tax return as a U.S. citizen.
For 2022, you can exclude up to $112,000 (up to $120,000 for 2023). This amount is adjusted annually for inflation.
If you’re worried about your student debt to the point where you want to flee to a new country, there’s a good chance you’d make less than this amount. If you made more than the exemption, you could exclude that hundred grand from whatever you make.
Let’s look at the case of an American-born veterinarian who is on the hook for $250,000 of student debt. She meets an Australian and they go live in Melbourne, Australia. She decides to stay there and work as a vet in Australia, making about $70,000 USD.
Those earnings would be exempt from U.S. taxation. She would have an AGI of $0. Under IDR, that $0 income would equate to $0 payments. This allows her to pay nothing while staying in good standing with her loans.
You don’t have to opt for deferment or tank your credit score and fall into default.
How to get a low student loan payment living internationally
You must certify that your income hasn’t changed on the income-based certification form. That’s true if you’re exempt from U.S. taxation because $0 AGI is not different year to year if you earn less than the allowed limit.
Moving abroad to avoid student loans is possible
So, if your gross annual income abroad is less than six figures, you generally don’t have to make payments on unpaid student loan debts thanks to this hack.
Then you submit your tax return electronically to your loan servicer that your income from last year was $0. This will result in a student loan payment of $0 a month.
This strategy works well for federal loan borrowers who opt for income-driven repayment. Unfortunately, borrowers with private student loans with private lenders don’t get to take advantage of this loophole. Therefore, if you refinance your federal debt with a private student loans company at any point, you won’t have access to this repayment hack.
Student loan forgiveness when living in a different country
You can visit the U.S. using this strategy as much as you want without worrying that customs agents will arrest you. I get this question all the time as if the government is going to want to put you in jail for paying nothing on your student debt because you live abroad.
Not only will they not arrest you, but you also don’t have anything to worry about.
You follow the extremely flawed student loan repayment rules, and if this results in a payment of $0, that’s not your fault. It’s the fault of the Congresspeople who put the flawed rules for these repayment plans into place.
Of course, a $0 monthly payment will cause the loan balance to grow a lot over time.
In 20 to 25 years, you will owe taxes on the forgiven balance, which could be from all the growing interest payments over the extended loan term. Or will you?
Declaring insolvency to get out of the student loan “tax bomb”
If you decide to make your permanent home overseas, you could keep most of your assets denominated in the foreign country where you live.
At the end of the loan forgiveness period, the IRS is supposed to assess your assets and liabilities. If the result is negative, they would likely wipe the taxes owed on your student debt. This is called the insolvency exclusion.
If you wanted to prepare for the compound interest and subsequent tax bomb just in case, you could just put away a few hundred a month in an investment account to have enough for the tax bomb.
Best countries to live for Americans with a lot of student loan debt
I know from a cousin of mine that New Zealand welcomes young Americans who are single.
It seems like a large number of Americans I know who are pursuing the “flee the country” strategy for their student debt live in Australia.
I’ve had some clients in the UK and the EU, though you seem to need a spouse to gain permanent resident status in a lot of those kinds of countries.
I haven’t seen as many people utilizing this strategy in Asia and the Middle East permanently. Still, they have utilized the foreign earned income exclusion to pay $0 while living there.
If you’re married to a foreigner and you owe student debt, it’s ok to move
I had a client recently who married a Scottish woman. He thought the only way to handle his massive debt from professional school was to return from where he got his degree in the UK back to the Pacific Northwest.
Their whole family support structure was in the UK. They had a small child, and his wife was unhappy.
He struggled to make even $1,000 monthly payments on his massive loan repayments.
He made the mistake of sending his loan servicers a letter from his international employer instead of his tax returns. Hence, he thought he had to pay a large amount overseas on his student loans.
After I explained the pay strategy for American expats, he realized he could sell his house in Seattle, ditch his mortgage and move back to the UK without worrying about his student loans’ principal balance.
Moving overseas to avoid student loans isn’t your only option
While I wanted to show you how cool this loophole is, moving overseas to avoid student loans isn’t your only option.
I’ve never seen a situation yet in over 10,500 clients we’ve made a plan for where they can’t achieve the life that they want while handling their student debt and balancing their personal finances.
Of course, if you do happen to meet “the one” and they’ve got a foreign passport, get ready to have some extra spending money on a faraway beach somewhere.
Thinking about fleeing the country because of student loans? Do any of these places cross your mind?