How Do I Pay My Student Loans When Living Abroad?
Living and working outside the United States is an exciting way to see the world and experience other cultures. For United States citizens in the process of paying back federal student loans, it can pose some challenges, and present some opportunities. Let’s take a look at some of the details of repaying student loans while living abroad.
Figure Out Banking Logistics
Be sure the bank account you’re using to pay your student loans is set up for international banking transfers. Large banks with an international presence such as Chase and Citibank are your best bet for this. Otherwise, you could wind up paying hefty fees every month, or run into glitches making your payments on time.
Set Up Auto-Pay
The best way to ensure you make your student loan payments on time every month is to set them up for automatic payments. Most loan servicers even offer a 0.25% interest rate reduction for setting up auto-pay. It might not sound like much, but the savings will add up over time.
Consider Federal Loan Consolidation
If you have more than one federal student loan, combining them into one new loan simplifies the payment process. Your new interest rate will be the weighted average rate of all your loans rounded up to the nearest one-eighth of a percent. Although consolidation doesn’t lower your interest rate, it does give you the convenience of making one monthly payment, rather than several.
Investigate Income-Driven Repayment
Applying for an income-driven repayment plan may result in a lower monthly student loan payment. These plans use your adjusted gross income, family, size and state of residence to determine your loan payment. For those living abroad and earning in foreign currency, this could mean a significant monthly payment reduction, particularly when the Foreign Earned Income Exclusion comes into play. According to the IRS, this allows U.S. citizens living internationally to exclude income they earn abroad from being taxed in the U.S. when it meets certain conditions.
If you earn less than the Foreign Earned Income Exclusion threshold (around $100,000), your Adjusted Gross Income is zero. For ex-patriots with an income-based student loan who settle abroad permanently, this can be a way to effectively write off the whole loan. Keep in mind when the loan is forgiven, the total forgiven value of the remaining loan balance (principal and interest) is considered income, so there will be a one-time income tax obligation (it can’t be excluded using the Foreign Earned Income Exclusion). However, the value of the income tax owed will be much less than the total value of the loan balance.
If you think you might benefit from the Foreign Earned Income Exclusion, talk with a tax professional. And for additional information on student loan repayment options, contact one of our certified student loan counselors.