When you move abroad, you open up a loophole in your student loan repayment options that can wipe out your entire balance without you paying a dime. The catch? The forgiveness isn’t instant, and the IRS may consider the amount forgiven as taxable income.
Related: Income-Driven Repayment Plan Forgiveness
Here’s how it works. The federal government created repayment plans that allow borrowers to cap their monthly payments at a portion of their income. To calculate their payment amount under one of the income-driven repayment plans — IBR, REPAYE, etc. — borrowers may submit a copy of their most recent federal income tax return showing their AGI to their loan servicer.
Here’s where things get interesting.
US Citizens who live and work abroad can use the Foreign Earned Income Exclusion* to exclude $112 thousand in foreign income. That means if you earn less than that amount in US dollars, your AGI will be zero, as will your monthly payment under an income-based repayment plan. And, because the Education Department writes off your loan balance after you’ve made your final payment under an IDR plan, you can get your federal student loans forgiven without making a physical payment or living in poverty.
Added bonus: The Education Department announced earlier this year that it would use a one-time waiver and account adjustment to retroactively credit borrowers for monthly payments made under non-IDR plans and for months spent in forbearance and deferment, including the payment pause. The IDR Waiver is expected to immediately forgive the debts of tens of thousands of people and push millions more closer to forgiveness.
Learn More: How to Pay US Student Loans From Overseas
* You also may be able to use the Foreign Tax Credit to help reduce your taxable income.