Secret’s Out: How to Reduce Your Student Loan Payments to $0 When You Go Abroad
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If you’re a millennial, you’ve had to endure a pretty harsh economic landscape. First, you graduated into the Great Recession, when good-paying jobs were scarce. Experts say millennials will never catch up financially to the previous generation. Sigh.
Second, millennials are dragged down by student loans, with more than 45 million borrowers owing a collective $1.56 trillion. Student loans have a nasty habit of eating up your paycheck before it even has the chance to settle into your bank account.
If you’re one of those 44 million burdened with student loans, you might think traveling the world is out of reach. But if you’re interested in living in another country long-term, an international lifestyle could actually work in your favor.
In fact, working abroad could mean your federal student loan bills get reduced to zero — and you could get loan forgiveness eventually. Here’s a little-known trick for traveling with student loans that could just get rid of your student loans once and for all.
How to reduce student loan payments to $0 while working abroad
If you just walked away from your federal student loans, you’d run into some pretty bad consequences. For one, your loans could go into default, which requires stressful maneuvering to get out of. Default can tank your credit score, which makes it hard to qualify for another loan, get a mortgage, or even rent an apartment in some cases.
Plus, if you default on federal student loans, the government can actually garnish your wages, dip into your Social Security, or take your tax refund. And all this time debt collectors will be calling; sometimes they can even contact your friends and family to get ahold of you.
So, just ditching your student loan bills when you travel wouldn’t be a great choice. But there is a trick to slashing your federal student loan bills without having your loans go into default: Apply for an income-driven repayment plan.
An income-driven plan adjusts your monthly payments
Income-driven repayment plans adjust your monthly student loan bills along with your income. There are a few options, but none of them ask you to pay more than 10% to 20% of your discretionary income.
In particular, the government looks at your adjusted gross income (AGI), or the money you make that’s subject to income tax. But if you’re living out the country, your AGI could be zero. And 10% or 20% of zero is still zero.
Why would your AGI be $0? Well, the government offers a Foreign Earned Income Exclusion when you pay your taxes. This means that your income will be tax-free, at least up to about $100,000.
When your student loan servicer goes to calculate your monthly payments on an income-driven plan, it will see that your AGI is $0, so your student loan bills will be slashed, as well.
Even if you don’t qualify for this Foreign Earned Income Exclusion, you might still consider applying for an income-driven plan to reduce your monthly payments. This could make them less burdensome and leave you with enough money left over each month to camp in Machu Picchu or backpack around Southeast Asia on your days off.
Your options for income-driven repayment plans
Federal student loans automatically go on the standard 10-year plan, but you can apply for an income-driven repayment plan instead. You have four options:
- Income-Based Repayment: Pay 10% or 15% of your discretionary income and extend your terms to 20 or 25 years, depending on when you borrowed.
- Pay As You Earn: Pay 10% of your discretionary income and extend your terms to 20 years.
- Revised Pay As You Earn: Pay 10% of your discretionary income and extend your terms to 20 years if you have undergraduate student loans and 25 years if you have graduate student loans.
- Income-Driven Repayment: Pay 20% of your discretionary income or what you’d pay on a 12-year fixed plan, whichever is less. This plan extends your terms to 25 years.
Note that extending your terms and lowering your monthly payments means your loans will collect more interest over the years. If you return to the U.S. and repayment resumes, you’ll be facing a bigger balance than when you started.
So while going on an income-driven plan can help in the short-term, it could also mean you pay more in the long run. That said, you might instead stay abroad for 20 or 25 years. If you’re still working out of the country after all that time, you could get total loan forgiveness.
Note that only federal student loans are available for these plans. Private student loans don’t have federal protections, like income-driven plans or deferment. If you’re having trouble keeping up with private student loan payments, speak with your lender or loan servicer about your options.
You’ll get loan forgiveness after 20 or 25 years
Anyone on an income-driven repayment plan doesn’t have to pay their federal student loans forever. After 20 or 25 years of on-time repayment, you’ll get loan forgiveness.
That forgiveness still comes into play even if your “on-time payments” were $0. So if you stay out of the country long enough, you could get your student loans wiped out completely.
But if you return to a U.S.-based job, your monthly payment will be recalculated based on your new income. So make sure you know how your student loan payment will change if you head back home.
You’ll still have to pay taxes on forgiven loans
While your student loan balance will be completely discharged, you might be on the hook for one last payment. Student loans that are forgiven from an income-driven plan are treated as taxable income.
So you’ll probably have to pay a tax bill on that forgiven balance. But it could be a lot less than what you owe, so it might be a small price to pay for getting rid of your student loans once and for all!
And if you’ve been living in a city with a low cost of living, you might have plenty of savings to make this one final payment.
Tips for finding a job abroad
Using this trick for reducing your student loan payments is best for individuals who want to work in another country long term.
So how can you find a job in another country? One way would be if your company has locations around the world. You could work out of its Hong Kong or Sydney office, for example, for a few years to pay off your student loans and save a bunch of money.
Another option is teaching English abroad. You might earn your TEFL certification and find a job in a private or public school. One place to start is with these government programs that place you in a school (and provides work visas). If you’d rather teach remotely, check out these 30 companies that offer online ESL teaching jobs.
Besides securing an income, you’ll also have to make sure you get a visa that lets you stay abroad long-term. But if you secure a position, hopefully your employer can help you get one.
Regardless of whether you live out of the country for 20 years or just one, remember that there are ways to manage your student loans while you travel. If you dream of exploring the world, your student debt doesn’t have to hold you back.