# Federal Student Loans and Adjusted Gross Income Abroad- Can any US graduates help?



## m.badger

G'day 

To finance my postgraduate degree I received some US federal student loans.

Shortly after graduation (during my six month grace period) I moved to Australia. 

At the moment I cannot really afford the Standard Repayment Plan and decided to apply for an Income Based Repayment Plan.

When I went to apply recently, I realized that for IBR they base your payments off roughly 10 % your Adjusted Gross Income.

My AGI is Zero, because of the Foreign Earned Income Exclusion !

10 % of 0 is 0-- so it looks like my payments on IBR are zero.  

Your debt gets forgiven after 20 years of payments, even if they are zero?

I've done some quick research on the internet. It appears that this IS a legitimate "loophole" that the IRS has allowed, since your taxable income is completely in another country. However I cannot find anyone who actually SAYS they have applied for IBR with FEIE and paid only zero (maybe for obvious reasons). Can any US expats with student loans help me on this?

To clarify- I am NOT for doing anything blatantly illegal or wrong. However I really need to get on an IBR payment plan- and when I go to do the application I only have to provide my AGI. Someone on a forum elsewhere was going on about the importance of providing the IRS with additional information when you are working overseas, but there is no such provision on the application! Only AGI.

Also, it turns out I will be staying in Australia for quite a while, maybe for good... so that's another factor if this is indeed legitimate! 

Could someone perhaps share their experience as I obviously do not want the IRS on my tail in future years 
Thanks


----------



## Bevdeforges

If it makes you feel better, you could always put a note on your AGI figure explaining that this is based on being eligible for the FEIE and let them figure out what (if anything) they want to do with that information.

I'm going to move this over to the Expat Tax section where we might be able to find someone with a bit more experience in these student loan matters.
Cheers,
Bev


----------



## m.badger

Thanks Bev. I didn't really see an option to add notes on the online application so maybe I'll send in a paper one and end up doing that instead.

I guess my main reason for posting is, is this FEIE "loophole" some sort of dodgy evasion that might come back to bite you-- or a genuine exemption for people who do not have any taxable US Income (above the FEIE threshold).

The latter sort of makes sense in one way- I mean you're no longer a US resident-- but on the other hand you'd think it's a bit of an unfair "out" for graduates with massive debt


----------



## BBCWatcher

If you're asked for your AGI you're asked for AGI. You answer truthfully. Yes, a zero AGI means a zero payment on your income-based repayment (IBR) student loan. There doesn't seem to be any particular controversy about that. That's what the regulations say (AGI), not Modified AGI (MAGI).

There are a couple important caveats, though, that you should be aware of:

1. Interest continues to accumulate on IBRs (normally over a 20 year period), and more interest accumulates when you're making zero payments -- but that only matters because of the second caveat;

2. At the end of the IBR (normally 20 years), the value of your debt (and interest) forgiveness is treated as taxable income, just like any other debt forgiveness. So you have to prepare for that future tax bill at the end of your IBR. (Now would be a good time to do that, when you're paying zero.) Refer to the IRS's instructions on how debt forgiveness is treated from a tax point of view.

So it's not a _complete_ waiver of your student loan debt. It's really a substantial waiver combined with a deferral of the remainder. But it's definitely an attractive loophole, and congratulations on being able to take advantage of it.

I'd also point out that it doesn't appear to be possible to qualify for the public service 10 year IBR if you're living and working overseas, or at least it's very difficult. Even so, this is a very good deal, obviously. You could end up paying zero and just paying the income tax on the forgiven remaining loan principle plus accumulated interest at the end of the 20 year IBR period. Not bad! (Note that such income tax on the debt forgiveness cannot be avoided through the Foreign Earned Income Exclusion since it's not foreign earned income.)


----------



## Nononymous

Nice one. Does Congress know about this?


----------



## Bevdeforges

Nononymous said:


> Nice one. Does Congress know about this?


Given the general level of consciousness in Congress these days, possibly not.:bolt:
Cheers,
Bev


----------



## BBCWatcher

Nononymous said:


> Does Congress know about this?


Yes. There are no promises this won't be changed at some point in the future, but for now it's a nice arrangement.

Let's illustrate how this all works with an example. Suppose you have $10,000 in outstanding student loan debt at 5% interest. Let's suppose that loan qualifies for the "Pay as You Earn" repayment plan for a 20 year term. Through operation of the Foreign Earned Income Exclusion your AGI is $0, and let's assume your AGI continues to be zero for 20 years. _Under current law and rules_ you would pay zero per month for 240 months, and your total loan forgiveness (including interest) would thus be $20,000 (principle plus accrued interest). So, 20 years from now, when the loan is forgiven, you'd pay income tax on that $20,000 (at whatever your normal income tax rate is then on that portion of your income).

In fact, under current law and rules it looks like you can earn even a bit above the Foreign Earned Income Exclusion/Foreign Housing Exclusion because your payment amount (under income-based repayment plans) is based on "discretionary income." Discretionary income is calculated as your AGI above 150% of the federal poverty line. Yes, that's AGI above 150% of the poverty line, not MAGI. So the fact you're way above the poverty line doesn't actually matter -- _your_ 150% poverty line calculation starts after the Foreign Earned Income (and Foreign Housing) Exclusions.

There are some other quirks. In particular, if you're married sometimes it makes sense to file a separate tax return from your spouse in order to drive down your AGI and thus your income-based payment amount. You'd also tend to do things like put financial assets in the hands of the spouse without student loan debt (or with less student loan debt) so that any passive income isn't counted toward the AGI for the person repaying student loan debt. The spouse with the student loan debt also would be more likely to be the stay-at-home parent, financially speaking, since AGI is based on market income, not on imputed income providing caregiving services within the home. And to the extent income can be deferred past the 20 year window that'd be preferable.

Anyway, to net it out, many Americans living and working overseas can effectively get free student loans (scholarships), albeit taxable ones, at ordinary income tax rates. This is yet another way that U.S. citizenship sometimes literally pays.


----------



## Nononymous

Bevdeforges said:


> Given the general level of consciousness in Congress these days, possibly not.:bolt:
> Cheers,
> Bev


Can't wait for someone to figure it out and start complaining about "deadbeat expats" legally walking away from student loans.

Remarkably bad piece of policy but I salute anyone who can take advantage of it.


----------



## maz57

That whole scenario is almost as goofy as CBT itself.


----------



## AmerInSyd

There is a thread about this on reddit:

[Americans] Living overseas + IBR/ICR = No Student Loan Payment : IWantOut

Commenters seem to agree that loophole is legit, though some note the caveats pointed out by BBCWatcher (interest accumulation, tax liability on debt forgiveness).


----------



## Nononymous

This is so brilliantly dumb, it really is. And after 20 years I wonder how many would suddenly forget to stay compliant...


----------



## BBCWatcher

Nononymous said:


> This is so brilliantly dumb, it really is.


Which part? The Foreign Earned Income (and Foreign Housing) Exclusions? 

"Be careful what you wish for."

Note also that those Americans who can take advantage of this provision are very frequently living in comparatively high income tax jurisdictions, and (absent a student loan) they really ought to be taking the Foreign Tax Credit, not the Foreign Earned Income Exclusion. The IRS is thus not blessing them with the excess Foreign Tax Credits they would otherwise be entitled to, to offset future U.S. taxes. Also, the education they received results in higher future tax receipts, on average. That's all part of the package, too.

The federal government makes money on student loans, even with this provision.

My prediction, for what it's worth, is that this attractive loophole will close at some point. But it'll only get closed when Republicans go along with various Democratic Party initiatives to improve education and the student loan program. (Or when one party can push through a change because it controls all levels of government.) Until then, inertia will rule.


----------



## BBCWatcher

Extending this discussion a bit, note that income-based repayment is tied to last year's AGI. If your AGI is 150% of the poverty line or lower, then your payment is zero.

I wanted to point this out because, if you live in a comparatively high income tax jurisdiction, it still might be sensible to skip the Foreign Earned Income Exclusion (and Foreign Housing Exclusion) and take only the Foreign Tax Credit, even taking your student loan impacts into account. If you take the FTC it'll be that much easier to contribute to an IRA and qualify for refundable tax credits, notably the Additional Child Tax Credit. It just depends on how much income you have and what your AGI would look like. Don't worry about "a bit" of income here -- a zero AGI doesn't actually have to be the goal.

Furthermore, note carefully the date when your student loan will be forgiven (assuming the rules don't change). If you can conveniently time an otherwise planned reduction in income for that particular tax year -- taking time off to care for a child or go back to school, for example -- then that loan forgiveness could be your only income or most of your taxable income for that particular tax year. And if that happens, the income tax on that loan forgiveness amount will be that much closer to zero. I'm not suggesting you get silly about that -- income is still a good thing to have, obviously -- but if you can conveniently schedule something you already plan to do, great.

As an editorial comment, it's really only a (mildly) citizenship-based tax system that can provide benefits like these through its tax code. RBTs cannot realistically provide such benefits. The United States has multiple negative income tax rate elements in its tax code, and this is one of them (AGI-based student loan repayments and loan forgiveness). If you qualify for an effective negative income tax, congratulations! It's certainly a great deal to get a heavily subsidized or even free (but taxable at ordinary income tax rates on a 20 year deferred basis) education at one of the world's finest universities -- U.S. universities consistently rank at the top of world rankings -- through this particular interaction between a U.S. federal government benefit and the U.S. tax code. Nice! (Though keep this generosity in mind if the day should come when you might owe a bit of U.S. income tax because you join the Six Percent Club.)

It's quite likely we'll see some increase in the negative income tax rate offerings since both political parties are in favor of such changes. For example, both parties now favor increasing the Earned Income Tax Credit (EITC), an important negative income tax rate element in the U.S. tax code. It's also at least somewhat likely that credits for children could increase, and that would be helpful to many overseas Americans.


----------



## BBCWatcher

*More Good U.S. Student Loan News*

There's some more good news to share about U.S. student loans, as reported in this story. (I think it makes sense to include this information in this thread discussing U.S. student loans and their tax implications rather than open a new thread.)

As background, there has been quite a bit of fraud in U.S. higher education in recent years, mostly within a segment of the "for profit" higher education industry. Private corporations aggressively entered the higher education market, and some of them simultaneously charged high rates of tuition and provided very poor educational programs. Many students attending such institutions took out large student loans (with government support) and ended up in debt either with no degree or with a worthless degree.

Congressional Democratic leaders including Senators Elizabeth Warren, Richard Durbin, and Sherrod Brown, and Congresswoman Maxine Waters, have been pushing and prodding both the U.S. Department of Education and the IRS to offer affected students both student loan forgiveness and tax relief. They are pushing for two basic remedies. First, they want a presumption in favor of students that attended particular named institutions that they were the victims of fraud so that they have straightforward, expedited claims for student loan forgiveness. Second, they want all students who were the victims of higher education fraud to not have to pay U.S. income tax on the value of student loan forgiveness.

Good news: they're succeeding. The U.S. Department of Education has announced that students who attended Heald College, one of the institutions within the Corinthian group of colleges, are presumptively the victims of fraud. That's 1,312 students who are now, as a cohort, presumptively entitled to student loan relief. The Education Department had already established that there was systemic fraud at Heald College, and now, thankfully, it's no longer necessary for each individual student to prove (again) that fraud existed. Heald is the first among what are expected to be more systemically fraudulent institutions that the Education Department adds to this particular list, allowing students who attended them to have "fast tracks" to student loan forgiveness.

More good news: the IRS has now taken the official position (through a "Revenue Procedure") that student victims of fraud who have their loans forgiven do not have to treat that loan forgiveness as income for U.S. tax purposes.

So, to summarize, if you've been the victim of fraud in higher education, it's starting to get easier to get your U.S. federally guaranteed student loans forgiven (whether you borrowed directly or through a financial institutions). And if those loans are forgiven because you've been the victim of fraud, now you don't have to pay U.S. income tax on the value of that loan forgiveness. See IRS Revenue Procedure 2015-57 for details.


----------



## Expat485

The information I have seen says the IBR plans last for up to 3 years while people who discuss this strategy mention the fact that your loans are forgiven after 20 years. Does one have to continue to reapply for the IBR plan every time it expires or am I missing something? Thanks!


----------



## taipei_kid

*application question*

Hey so this is for anyone who has done the IBR plan from abroad. Did you have to fill out the paper version from the website and mail it in, or were you able to just sign up online?

I've been trying to sign up online for this plan but the online preset questions or fill-ins assume I'm working or living in the States. A lady from customer service thinks I need to do the paper version.
So just asking you all here for a second opinion.


----------

