Guide To Federal Student Loans For Expats

U.S. citizens are eligible for U.S. federal student aid regardless of where they live. This means that expats can qualify for federal student loans. 

But there are a few complications and opportunities when borrowing and repaying federal student loans for expats. 

Here's what you need to know if you're a U.S. citizen living abroad and you're hoping to take out federal student loans for yourself or for your children.

Ways For Expats To Save For College

Expats can save for college in 529 college savings plans. Distributions are tax-free only if used to pay for qualified higher education expenses at colleges that are eligible for federal student aid. 

Qualified higher education expenses include tuition, fees, books, supplies, equipment, room and board (if enrolled at least half time), computers, internet access, and special needs expenses. Travel and transportation expenses, however, are not qualified higher education expenses. A 529 plan can also be used to repay up to $10,000 in student loans per borrower (lifetime limit). 

Expats are also eligible to claim the American Opportunity Tax Credit, Lifetime Learning Tax Credit and Student Loan Interest Deduction on their U.S. federal income tax return. 

Related: How To Save For College [The Best Order Of Operations For Parents And Families]

Federal Student Loans For Expats: How To Apply

To apply for financial aid, complete the Free Application for Federal Student Aid (FAFSA) based on the income reported on both the U.S. federal income tax return and the foreign income tax return being careful to not double-count any income. 

The U.S. federal income tax return has a foreign earned income exclusion that can shelter just over $108,000 of income earned in a foreign country. But the sheltered income must still be reported on the FAFSA. Foreign income should be converted to U.S. dollars using the exchange rate in effect on the date the FAFSA is filed. Exchange rates are published in the H.10 report on the Federal Reserve Board’s website. 

About 400 international colleges are eligible for U.S. federal student aid, in addition to thousands of U.S. colleges. However, students who are enrolled at foreign colleges may receive only federal student loans. They're not eligible for federal grants. Use the FAFSA’s Federal School Code Search to search for eligible foreign colleges. Specify Foreign Country, Canada or Mexico as the state. 

For help with the FAFSA, domestic students can call 1-800-4-FED-AID (1-800-433-3243). If calling from outside the U.S., the toll numbers are 1-334-523-2691 and 1-319-337-5665. The Federal Student Aid Information Center (FSAIC) also provides online chat and email functionality. A financial aid administrator at a participating college can also help students with their FAFSA and federal student aid questions.

Federal Student Loans For Expats: How To Repay

Making payments on a student loan can be challenging for expats. It's best to consolidate or refinance your student loans to simplify repayment, so that you have just one loan. (Borrowers should not refinance federal student loans into a private student loan, for reasons discussed in the next section.)

Update your contact information with the loan servicer, so that they have your foreign address, not just a U.S. address. This will reduce the likelihood of delays in contacting you. Nevertheless, international postal mail can be slow, so allow extra time before the deadlines.

Sign up for autopay as you will be less likely to be late with a payment if payments are transferred to the lender automatically from your bank account. (The main circumstance in which you might be late with autopay will occur when there are insufficient funds in the account.) Many lenders give a discount, such as a 0.25% or 0.50% interest rate reduction, as an incentive for borrowers to sign up for autopay.

Evaluate Your Banking Options

It is best to use an international bank that has branches in both the U.S. and your country, such as Chase, Citibank, or HSBC. Also consider a U.S. brokerage account with cash management features, such as the ones offered by Fidelity Investments and Charles Schwab. Online banks like Ally and Capital One may also be useful. Check whether the bank charges foreign transaction fees.

Otherwise, choose a local bank account that can be enabled for international fund transfer to a U.S. bank account. You may need to set up automatic transfers from your local bank account to the U.S. bank account, in addition to setting up the U.S. bank account for autopay to the loan servicer.

Pay Attention To The Exchange Rates

Beware of fluctuating currency exchange rates if your money is not in a dollar-denominated bank account. Confirm that the U.S. bank allows transfers in foreign currency.

You may need to transfer more than the loan payment amount to allow for changes in the exchange rate in addition to electronic transfer fees.

Related: Best Apps To Send Money (Domestic And International)

Stay Current On Your Federal Student Loans

Don’t default on your student loans. While it's more difficult for a U.S. lender to collect from an expat, they can get a court order to seize U.S. assets. The federal government can also garnish up to 15% of wages from U.S. employers, intercept federal income tax refunds, and offset up to 15% of Social Security benefit payments. 

Default can also affect your credit scores. If you default on a private student loan, the lender can seek repayment from the cosigners on the private student loan.

Income-Driven Repayment Loophole For Expats

Some expats repay their federal student loans using income-driven repayment plans because a loophole can yield a $0 monthly payment.

The monthly payment under an income-driven repayment plan is based on a percentage of discretionary income. Discretionary income is the amount by which adjusted gross income (AGI) exceeds 150% of the poverty line (IBR, PAYE and REPAYE) or 100% of the poverty line (ICR).

But if you file a U.S. federal income tax return, the foreign earned income exclusion shelters about $100,000 of income earned in a foreign country for taxpayers who reside outside the U.S. The foreign earned income exclusion is $108,700 in 2021, and is adjusted annually for inflation.

The foreign earned income exclusion is claimed on IRS Form 2555 and reported on line 8 of Schedule 1. This, in turn, is reported as an adjustment to income on line 10a of IRS Form 1040.
If your foreign earned income is less than the exclusion amount, your AGI might be zero. Note that unearned income, such as interest, dividends and capital gains, is not sheltered by the foreign earned income exclusion.

After 20 or 25 years in an income-driven repayment plan, the remaining balance will be forgiven.
Normally, the cancellation of debt is reported as income to the borrower on IRS Form 1099-C. This replaces the student loan debt with a smaller amount of tax debt. Taxpayers may be able to get the IRS to forgive the tax debt if they are insolvent (total debts exceed total assets). Otherwise, they might be able to negotiate an offer in compromise or get a 6-year payment plan.

The American Rescue Plan Act of 2021 provides tax-free status for all student loan forgiveness through December 31, 2025, including the forgiveness at the end of an income-driven repayment plan. This tax-free status may be extended or made permanent.

The income-driven repayment loophole may end at any time. The regulations for the income-driven repayment plans give the U.S. Department of Education the authority to require borrowers to provide alternative documentation of income if the U.S. Department of Education “believes that the borrower’s reported AGI does not reasonably reflect the borrower’s current income.” [34 CFR 685.209(a)(5)(i)(B) for PAYE, 34 CFR 685.209(b)(3)(i) for ICR, 34 CFR 685.209(c)(4)(i)(B) for REPAYE and 34 CFR 685.221(e)(1)(ii) for IBR]

Final Thoughts

The income-driven repayment plan loophole is not necessarily a good option if you plan on eventually returning to the U.S. Interest continues to accrue during an income-driven repayment plan, increasing the amount of debt. 

If you return to the U.S., your income will no longer be sheltered by the foreign earned income exclusion and your loan payments will increase. Depending on the specific income-driven repayment plan, the loan payments may be capped at the standard repayment amount or they might increase as income increases.

Some expats may be wondering if it would be worth it to refinance their students loans to a lower interest rate. If you're planning to pay your loans as agreed (in 10 years), this could make sense. But since private student loans don't offer income-driven repayment plans, you shouldn’t refinance your federal student loans if you want to use the expat loophole to have a $0 monthly payment.