Loophole to Not Pay Student Loans Exposed

An unexpected revelation on TikTok brought to light a legal loophole for U.S. student loan repayment—Americans living abroad may not have to pay back their student loans, potentially saving thousands in debt repayment.

The loophole, which hinges on an income-based repayment plan called Pay As You Earn (PAYE), utilizes the Foreign Earned Income Tax Exclusion to report an Adjusted Gross Income (AGI) of $0 to the IRS. This means that if an American expat earns under a certain threshold—$120,000 for 2023—they could legally owe nothing on their student loans each month, and after 20-25 years, the loans could be totally forgiven under current federal guidelines.

In the video that has gained over 20,000 likes, TikTok user Soldana shares that moving abroad has allowed her to exploit that provision, reducing her monthly federal student loan payments to zero.

Her claim is corroborated by Travis Hornsby, CFA, CFP, and founder of StudentLoanPlanner.com, who explained in a blog post earlier this month that many of his clients have successfully employed the strategy by relocating to countries with a lower cost of living. The legal approach, as Hornsby outlined, can significantly benefit those with substantial student loan debt.

Newsweek reached out to Hornsby at StudentLoanPlanner.com via email and received an out-of-office reply.

The financial hack, which might sound too good to be true, is backed by the IRS’s Foreign Earned Income Tax Exclusion, Hornsby said in the blog post, a provision that allows U.S. citizens living abroad to exclude a certain amount of their foreign earnings from U.S. taxes. For this year, that amount is up to $120,000. For tax year 2024, the foreign earned income exclusion is $126,500, according to the IRS.

In practical terms, if an American expat earns less than the threshold, their reported Adjusted Gross Income (AGI) to the IRS could be $0, and consequently, their required monthly payment under income-driven repayment plans like PAYE would also be zero.

The strategy taps into the nuanced tax laws and repayment regulations that govern federal student loans, and while it may seem like a financial silver bullet for those burdened with debt, it’s not without its caveats and conditions.

For instance, the student loan expert said the approach is only applicable to federal student loans and not private ones. More than that, individuals who have refinanced their federal loans with a private company lose access to the repayment option. Also, it’s crucial to note that this is not a debt cancellation but a deferment of payment, which could potentially lead to a high tax bill on the forgiven amount after 20 to 25 years under the current Public Service Loan Forgiveness program.

However, the IRS does provide a potential escape from what’s known as the “tax bomb” through the insolvency exclusion, which may apply if the borrower’s total liabilities exceed their assets at the time the remaining loan balance is forgiven.

This means that if an expat’s financial obligations are greater than their total financial resources when their student debt is forgiven after the 20-25-year mark, they may not be responsible for paying taxes on the forgiven debt. Essentially, borrowers could find themselves exempt from the additional tax burden if they can demonstrate insolvency at the time of forgiveness, turning what could have been a hefty tax liability into a non-issue.

As for where to relocate, Hornsby noted that countries like New Zealand and Australia are popular among Americans adopting the strategy, with other StudentLoanPlanner.com clients settling in the U.K. and the EU—though the latter often requires marriage to a local for permanent residency.