Lana Oconnell
Moving abroad is an appealing prospect for many graduates seeking to escape their student loan debts. However, student loans are not cancelled by relocating to another country, and the consequences of defaulting can be severe. While it is possible to legally pay $0 a month on federal student loans, this results in a growing loan balance over time, which can lead to a huge tax bill when the loan term ends. To avoid this, federal loan borrowers can take advantage of income-driven repayment (IDR) plans, which can reduce monthly payments to $0, depending on income. Additionally, the Foreign Earned Income Tax Exclusion allows U.S. citizens to exclude a certain amount of their foreign earnings from their tax returns. Nevertheless, interest continues to accrue, and strategic planning is required to navigate logistical and financial challenges, such as transferring funds from foreign banks.
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What You'll Learn
Student loan forgiveness programs
- Moving abroad does not automatically qualify you for student loan forgiveness. Your loans remain your responsibility, and you need to continue making payments or pursue a forgiveness strategy.
- Public Service Loan Forgiveness (PSLF) is a popular option that forgives your remaining federal loan balance after making 120 on-time payments while working for a qualified employer. This includes working for the government or a not-for-profit organization.
- If you work remotely for a U.S.-based employer, you may still be eligible for PSLF as long as your job qualifies as public service and meets the 30-hour-per-week requirement.
- Income-Driven Repayment (IDR) plans base your monthly payment on your income and family size. After 20 or 25 years of payments, the remaining balance on your student loans may be forgiven.
- The Segal AmeriCorps Education Award is a benefit for those who complete a term of national service in an approved AmeriCorps program. The award can be used to repay qualified student loans, and the service can also count toward PSLF.
- The TPD discharge is an option for individuals with a disability that severely limits their ability to work. If approved, individuals with federal student loans do not have to complete their Teacher Education Assistance for College and Higher Education (TEACH) Grant service obligation.
- Forbearance or deferment options are available for those who cannot afford their payments. Interest may accrue during this time, depending on the type of loan and eligibility for a deferment program.
- The insolvency exclusion could be beneficial if you plan to make a permanent home overseas. At the time of loan forgiveness, if your liabilities outweigh your assets, the tax on the forgiven amount may be eliminated.
- Federal loans remain under the jurisdiction of the Department of Education, and private loans fall under the terms of your agreement. Understand the rules and requirements of your specific loans.
- Currency transfer fees and exchange rates can impact the cost of your loan payments when paying from another country. Consider using a U.S.-based bank account or services like Wise to facilitate international fund transfers.
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Payment options from abroad
Moving abroad doesn't cancel your student loans, but the way you manage them may change. Federal loans remain under the Department of Education's jurisdiction, and private loans still fall under the terms of your agreement.
- Maintain a US-based bank account: Some federal student loan servicers stipulate that payments must be made from a US bank account or with US-based funds. Therefore, it is advisable to hold on to your US bank account even when you move abroad. You can set up automatic monthly transfers from this account to cover your loan payments.
- Use a foreign bank account: If your employer requires you to use a foreign bank to get paid, you can transfer money between your foreign bank and a US bank to pay your student loans. However, you may incur currency transfer fees and need to consider exchange rates.
- Explore loan forgiveness programs: Various student loan forgiveness programs can erase part or all of your student loan debt. For example, Public Service Loan Forgiveness (PSLF) forgives your remaining federal loan balance after 120 on-time payments while working for a qualified employer. Moving abroad could halt your progress toward forgiveness unless you continue working for the same organisation.
- Take advantage of income-driven repayment (IDR) plans: Federal student loan borrowers can benefit from IDR plans, which are based on their adjusted gross income from their tax return. With the foreign earned income exclusion, you can exclude foreign earnings from your gross income when filing a US tax return. This could result in a monthly payment as low as $0, but interest will continue to accrue.
- Defer your loans or apply for forbearance: If you cannot afford your payments, you can defer your federal loans or apply for forbearance. Interest will accrue during both deferment and forbearance for unsubsidized federal loans, but not for subsidized federal loans that are eligible for a deferment program.
- Seek alternative financing: If you plan to attend school in another country, you may be eligible for federal student loans for international or foreign schools. Some private lenders also lend to US students studying abroad.
It is important to carefully consider your payment options and seek professional advice to ensure you can continue to manage your student loan payments while living abroad.
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Impact on credit score
Moving abroad doesn't cancel your student loans, and defaulting on your student loans can severely damage your credit score, with long-term consequences that are difficult to shake off. This is true for both federal and private student loans, as late payments and defaults will be visible on your credit report. A bad credit score can make it difficult to take out future loans, rent an apartment, buy a house, or open a credit card.
If you have federal student loans, they remain under the jurisdiction of the Department of Education, and the US government can garnish your wages, seize your tax refund, and come after your Social Security benefits. Private lenders have fewer ways to pursue you outside the US, as they can't garnish your wages without a US court order, and serving legal papers in a foreign country is difficult and expensive. However, private loans tend to be less flexible and have fewer borrower protections.
If you plan to move abroad, it's essential to create a plan to ensure you don't fall behind on repayments or go into default. Maintaining a US bank account can help avoid the hassle of transferring money and converting currency from a foreign bank account to make payments. Additionally, consolidating your student loans into one streamlined monthly payment and negotiating income-based repayment plans can help lessen the financial burden of your payments.
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Foreign bank transfers
Moving abroad does not cancel your student loans, and you will need to continue making payments. There are a few options for how to do this if you are being paid in a foreign currency. Firstly, you could set up a U.S.-based bank account and transfer money into this account from your foreign bank. You can then use this U.S. account to pay your student loans. It is worth noting that some student loan providers require payments to be made from a U.S. bank account or with U.S.-based funds.
If you are planning to live abroad for a long time, you could take advantage of the foreign-earned income exclusion. This allows you to exclude foreign earnings from your gross income when filing a U.S. tax return. For 2024, the maximum amount you can exclude is $126,500, though this figure adjusts annually with inflation.
Another option is to use a service such as Wise to move funds internationally. However, it is important to be aware of currency transfer fees and exchange rates, which can impact the amount you are paying.
It is also possible to set up automatic payments from your U.S. bank account, so you don't have to worry about remembering to pay manually each month.
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Currency exchange rates
For example, if you have a UK-based student loan and move to Spain, your salary will be converted from Euros to GBP using the exchange rate for Spain. This exchange rate is reviewed annually on 6 April and is based on the average currency exchange rates for the most recent calendar year published by HMRC. While these reviews won't reflect month-to-month rate changes, they ensure that your salary conversion remains relatively up-to-date.
Similarly, if you're repaying US student loans from abroad, you may need to transfer money to a US-based bank account. Services like Wise allow you to transfer money internationally and take advantage of favourable exchange rates. By setting up reminders, you can transfer money in bulk when the exchange rate is in your favour, thus minimising the impact of currency fluctuations on your loan payments.
Additionally, some US bank accounts, such as the Charles Schwab High Yield Investor Checking account, reimburse worldwide ATM fees and work with international ATMs. This allows you to access your funds and make payments directly from your US-based account, potentially saving you from incurring additional fees associated with currency exchange.
Overall, staying informed about currency exchange rates and utilising tools like international money transfer services can help you effectively manage your student loan payments while living abroad.
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Frequently asked questions
Yes, moving abroad does not cancel your student loans. You can still make your payments, but the way you manage them may change.
Some loan servicers require payments to be made from a US bank account or with US-based funds. Additionally, you may need to deal with currency transfer fees and exchange rates, which can impact the amount you're paying.
You can set up automatic payments from a US-based bank account. It is also recommended to keep your US bank account open and funded to cover your monthly payments.
Defaulting on your student loans can have consequences. The US government can garnish your wages, seize your tax refund, or affect your credit score. It may also impact your employment opportunities if you return to the US.
Federal student loan borrowers may be eligible for income-driven repayment (IDR) plans or loan forgiveness programs. Moving abroad may impact your progress toward loan forgiveness, so it is important to understand the requirements.
