Student loan debt affects over 40 million Americans, and according to a recent survey by LendingTree, 60% of LGBTQ borrowers “regret taking out student loans.” Student loans can make it seem impossible for queer millennials to achieve common rites of passage like buying a house or even traveling the world.
After all, your student loan payments won’t just be put on hold if you go on a working holiday to Australia or take a backpacking trip in SE Asia. Or will they?
Thanks to a little-known feature of the U.S. tax code called the Foreign Earned Income Exclusion (FEIE), you may be able to reduce or eliminate your student loan payments by spending enough time living and working overseas.
Here’s what digital nomads need to know about the FEIE, including who’s eligible, how to qualify for it, and how much it can save you on your student loans.
What Is the FEIE?
The Foreign Earned Income Exclusion (FEIE) is a provision in the U.S. tax code that allows eligible citizens and resident aliens to exclude certain types of income earned overseas from federal income tax liability while living abroad.
For the 2023 tax year, you could exclude a maximum of $120,000 in earned income — which means payments for work you performed (i.e., not passive income, dividends or royalties). Crucially, this can include self-employment income and wages from U.S. employers so long as that work was performed in a foreign country.
There are two ways to qualify for the FEIE: the Physical Presence Test and the Bona FIde Resident Test. Let’s take a look at both options one-by-one.
The Physical Presence Test
The Physical Presence Test requires you to spend 330 days in one or more foreign countries (not international waters) in a rolling period overlapping the relevant tax year. If you lived overseas from July 1st 2023 to June 30th 2024, for example, you might be able to claim the Foreign Earned Income Exclusion for half of each tax year.
However, as the IRS explains, you aren’t eligible “if your abode remains in the United States (where you keep closer familial, economic, and personal ties).” You’ll need to establish a foreign tax home, such as by renting an apartment abroad, and have no immediate plans to re-establish residency in the U.S.
Example: Jordan applies for a digital nomad visa to Costa Rica. She ends her lease in New York City, puts all of her stuff into storage, and rents an apartment in La Fortuna, where she continues freelancing for U.S. clients. Even though Costa Rica doesn’t tax digital nomads, it’s her new “tax home,” so she qualifies for the FEIE.
Bona Fide Resident Test
The Bona Fide Residence Test is for U.S. taxpayers who have established residence in a foreign country for an “uninterrupted period that includes an entire tax year.” To qualify for the FEIE, you’ll need to establish more extensive ties to your new home, such as getting a driver’s license, paying local taxes, or applying for a permanent visa.
Once you qualify for the bona fide resident test, you’ll automatically qualify for the FEIE in future tax years as long as you maintain your residency there. You’ll also be able to visit the U.S. for longer periods, since you won’t have to meet the 330-day physical presence test. However, any work you do while in the U.S. won’t count as foreign income, and your trips need to be temporary in nature.
Example: Patrick goes on a working holiday to Australia. While he’s there, he enters a relationship with Kabir, an Australian citizen, and makes plans to live there permanently. Although he visits his family in the U.S. every year and works for a U.S. employer, he meets the Bona Fide Residence Test and qualifies for the FEIE.
How Does the FEIE Affect Student Loans?
The Foreign Earned Income Exclusion allows you to exclude up to $120,000 of income on federal income tax return. But how does this affect your student loans? If you’re on an income-based repayment plan, then your monthly student loan payments are based on your Adjusted Gross Income (AGI). This is the line on your tax return that your student loan servicer will look at when calculating your payment amount.
Let’s say you’ve earned $50,000 in a given tax year and have $30,000 in student loans. If you lived in the U.S. and were taxed on all of your income, your AGI would be a little less than $50,000, give or take some deductions. Your monthly payment could be as high as $143 on some versions of the SAVE plan.
If you qualified for the FEIE for the entire tax year, your AGI would be $0 — and your monthly loan payments would be $0 too. Your student loan servicer doesn’t take your actual income into account when determining your ability to pay, just your AGI.
Is it Worth Reducing Your Student Loan Payments with the FEIE?
If you’re struggling with student loan payments, then it might seem counterintuitive that moving overseas — and potentially increasing your living expenses — could save you money in the long run. Whether or not it’s worth it will depend on how much you earn, your ties to the U.S., and your usual living expenses.
After all, reducing your student loan payments to $0 won’t pause them, so you’ll still be accruing interest. If you move back to the U.S. and no longer qualify for the FEIE, then your balance will be higher and your monthly payments will resume.
But if you’re on track to have your student loans forgiven through one of the federal government’s student loan forgiveness plans, the calculation changes.
Imagine that your student loans are eligible to be forgiven within the next five years, but you’re making $500 in payments every month, or $6,000 per year. That’s $30,000 over the course of those five years. By spending five years abroad — with some visits back to the U.S. — you’ll have an extra $30,000 at the end of that 5-year period.
Of course, if you’re earning $30-40,000 per year, then your student loan payments are likely to already be $0, or a manageable amount, under the SAVE plan, so it may not make much of a difference whether or not you claim the FEIE.
How to Reduce Your Student Loan Payments with the FEIE
The FEIE may seem complicated, but it doesn’t require any extra paperwork beyond the forms you already need to file — like your tax return. Follow these three steps to qualify for the FEIE, lower your AGI, and reduce your student loan payments:
1. Meet the criteria. To qualify for the FEIE, you’ll need to meet the Physical Presence Test or the Bona Fide Resident Test. That means you’ll need to keep track of the time you spent in the U.S. and in one or more foreign countries — and keep the receipts of your flights and living arrangements in case you’re ever audited.
2. Claim the FEIE on your tax return. Next, you’ll need to claim the FEIE on your tax return for the tax year or years you’re eligible. If you’re a bona fide resident of a foreign country, you may be eligible for a foreign tax credit, which can reduce your tax liability, but doesn’t affect your AGI. Ask your tax preparer to claim the FEIE instead.
3. Apply for an income-based repayment plan — or recertify an existing one. If your student loan servicer offers electronic recertification, you can provide consent for them to access your tax information automatically, so they can check your AGI every year via the IRS and update your payments accordingly.
Ask Your Tax Preparer About the FEIE
The FEIE can reduce your income tax and lower your student loan payments: what’s not to like? Unfortunately, like everything else with the IRS, the FEIE is complicated, and you’ll want to ask a tax professional if it’s a good idea for you to claim it.
Claiming the FEIE can increase your risk of being audited, so choose a tax preparer who specializes in expats or digital nomads to make sure they do it right.
Also, keep in mind that the FEIE won’t eliminate your U.S. tax bill entirely. If you’re a U.S. citizen, you’re required to file a tax return every year, even if you pay taxes to a foreign country. You may also need to report your foreign bank accounts if they total more than $10,000 USD at any given time.
Note: The information contained in this article applies to both traditional Income-Driven Repayment (IDR) plans, as well as the new SAVE plan. The advice is general in nature and not specific to you. Student loan policies may change at any time, so consult with a tax professional before making any major life changes. We recommend NomadTax.io for digital nomad tax prep and tax consultations.
Photo credit: Aiden Frazier