US citizens who leave for a new country and don't pay their federal student loans will eventually default.
And when they default, they'll have to deal with the consequences of student loan default:
- late fees will be added to your balance
- wage garnishment
- tax refund offset
- Social Security benefit offset
- negative credit report information will be sent to the credit bureaus and
- your professional license may be suspended
Americans don't need to worry, however, about losing their passport privileges. You can freely travel to and from the United States without issue, even if your student loans are in default.
And they don't need to worry about going to jail. You can't go to jail for student loans.
But you do need to worry about your federal student loan debt ballooning.
When you're in student loan default, the interest rate isn't suspended. It keeps growing. And that's on top of the collection fees that will be added to your account.
There's no statute of limitations for federal student loans.
Your federal loans don't go away just because you're an ex-pat.
Private student loans are different.
What to do with your federal student loans in a new country
US citizens who move to a new country can exclude $100 thousand in income earned abroad from their US tax return. The federal government lets Americans exclude their income through a tax rule called the Foreign Earned Income Tax Exclusion.
Foreign Earned Income Tax Exclusion
The Foreign Earned Income Tax Exclusion allows you to exclude your income if you earn less than $100 thousand annually.
If your income is excluded, your adjusted gross income on your tax return may be $0.
The Department of Education's payment plans offers borrowers based on income to calculate their payment using their family size and AGI.
If your AGI is $0 on your tax return, then your monthly payments under an income-based repayment plan will be $0 as well.
Your student loan payments will remain $0 for the next 12 months.
There's no need to put your loans in deferment or forbearance.
Your payment is legally $0/month.
And if the income on the tax return you file with the IRS is again $0 due to the Foreign Earned Income Tax Exclusion rule, then your payment will again be $0.
You can keep making until you qualify for student loan forgiveness after 20 to 25 years of monthly payments. (Borrowers who work for a government or nonprofit entity may also be eligible for the Public Service Loan Forgiveness Program after 10 years of payments.)
Leaving the country and private student loan debt
Private student loans are subject to the statute of limitations. (Which statute of limitations apply is a complicated question to answer.)
When you move to a foreign country and don't pay your private student loans, your loans will first become delinquent. Eventually, they'll default.
And when they do, private lenders and debt collectors don't have many options.
Sure, they can report negatively on your credit report, which will cause your credit score to plummet.
But they can't garnish your wages. They can't take money out of your bank account.
Until a private lender sues you, the only thing they can do is keep sending negative information to your credit report (and your cosigner's credit report).
Click here to read What Happens if You Never Pay Your Student Loans?
Consequences of not paying private student loans
That brings us to two questions:
- When will a private lender sue you for student loan debt and
- What happens if they sue you?
There's no answer for when a private lender will sue you for a defaulted student loan. Usually, they don't sue you immediately after your account is no longer in good standing. In my experience, it happens a few years after defaulting.
But even if they sue, they have to serve you. And that's hard to do when you're out of the country.
I've never seen a private lender sue a student loan borrower in their new country.
I have, however, seen the lender/collection agency sue the cosigner who remains in America.
So that's the real risk you run.
To avoid the risk of your cosigner being taken to court for your unpaid debts, I would explore negotiating a student loan settlement.
Could I refinance my federal loans with a private lender and then leave the country?
Refinancing your federal student loans with a private lender and then moving to a new country with a lower cost of living is one option to try and tackle your student loan debt.
There are a bunch of financial institutions that have jumped into refinancing student debt. So depending on your credit history and personal finances, you should be able to get a competitive interest rate.
But what happens if you stop paying while living abroad?
Probably the same thing that would've happened if you hadn't refinanced your private loans.
Best countries to move to escape student loans
Honestly, there's no universally best place to move to escape your student loan debt.
I have clients that left New York for the UK.
And I've had others move from California to Bangkok.
IMO, you move to a different country that you love and figure the rest out later.
Where would I move?
I've been looking into Mexico City and Belize.
They both have much lower expenses than the US.
Mexico City is great because it's a large, cosmopolitan city. Plus, it's a short flight back to the states. I can rack up a bunch of points on my credit card.
The latter is true about Belize. It's a short flight back to Kansas City. Plus, English is the national language.
Move where you want. Don't let your student loans stop you from living your life.
Let's talk if you're thinking about moving abroad to escape your student loans or if you're moving back after having ignored your student loan debt.