College graduates face a harrowing financial future, with a decade or more of substantial student loan repayment ahead of them. Paying down student loans has been documented as having an impact on everything from home ownership to childbearing. It’s no wonder that some borrowers seek to avoid repaying their student loans by leaving the U.S.
Despite the benefits of a college education, the cost of higher education has proven detrimental to an alarming number of Americans. Certainly, a college degree does ensure higher earning power for many. But, some drop out of college, leaving them with debt but no degree. Others find their salaries after graduation unequal to the debts they’ve incurred. Wages have stagnated, failing to keep pace with inflation and increases in student loan debt.
Some graduates, wisely, enroll in income-driven repayment plans that allow them to pay in accordance with what they earn. Others, less wisely, go into default or forbearance and face still more serious consequences. And a handful take more drastic measures: they simply flee the country, hoping to leave their financial catastrophes behind and start a new life.
This sounds appealing. Abandoning your debt and pursuing a fresh start in an exotic locale seems romantic and even pragmatic. If you can leave thousands upon thousands of dollars of debt behind you without consequence, why wouldn’t you? Assuming you are willing to abandon your homeland, your family and friends, and the financial foundation you’ve established, living as a financial fugitive may well seem like a viable option.
Indeed, for a handful of determined people, it many very well be. But for most, the trade-offs will be untenable.
What Can You Get Away With?
If you really want to head for the hills, and plan on staying there, there’s not a whole lot your loan servicers can do to stop you. Creditors, including the federal government, are unlikely to pursue you in a foreign country, where financial systems and rules may be much different than in the U.S.
Theoretically, you can remain out of the country and set up a new life. You can even re-enter the country for periodic visits without fear of arrest. You may get some collections calls, but that’s about it.
A number of recent news stories have related the tales of borrowers who, fed up with their debt obligations, did just that. One graduate decided to permanently relocate to India, where he married a local. The cost of living is much lower, and, while the standard of living is lower as well, he reports that he is happy and satisfied.
Other debtors have fled to such far-flung locales as China, New Zealand, Australia, and Ukraine. Many find employment teaching English. They plan to stay there.
If you wish to return to the States permanently at some point, though, it is advisable to take some legal steps. You may be able to defer your loans or put them into forbearance, essentially hitting pause on your obligation to repay them. Of course, during this period, interest continues to accrue and you will get hit with sizeable interest payments that inflate the cost of your educational debt.
Such programs as the Peace Corps, which facilitates travel, have specific provisions that allow for deferment, as does enlisting in the U.S. Armed Forces.
Alternately, you can enroll in an income-driven repayment plan that allows you to pay on your federal loans according to what you make. Under these plans, you pay 10-20% of your discretionary income toward your loans. After 20-25 years under these plans, the loans are forgiven.
If your income is under 150% of the poverty line, your monthly payment will be zero under most income-driven repayment plans.
However, if you lose eligibility due to an increase in income, you are still liable for whatever amount remains. And even if you do remain under the income threshold for the entire repayment period, you will still need to pay the taxes on the forgiven debt at the end of the term.
If you simply up and leave the country, it will likely be difficult or impossible for your lenders to track you down and hold you accountable. Of course, it will be difficult to establish credit in a new country and you will likely have to rely on cash until you can do so.
In any case, abandoning your debt doesn’t actually make it go away. If you stop payments on your federal loans for 360 days, they go into default. (Private student loans go into default after 120 days of nonpayment.)
The federal government can garnish any wages (up to 15%) earned working for U.S.-based companies and can also offset your income tax refunds and, later, your Social Security benefits in order to recoup the loss. And federal loans have no statute of limitations, so these collection efforts will likely persist indefinitely. Private loans do have a statute of limitations, but this can be paused if lenders can prove that you have left the country.
Both the federal government and private lenders can sue in the absence of repayment.
Further, if you have a cosigner on your loans, which most private student loan borrowers do, the lender can, and likely will, go after their assets as well. So, while you may be idling your days away in tropical bliss, your parents or guardians will be left in the lurch.
So, too, your own credit will take a massive hit. If you ever wish to return to the United States, you will be faced with a panoply of problems: qualifying for home and car loans will be difficult, credit card companies will be hesitant to lend to you, and even rental housing may prove challenging to find if landlords run a credit check.
Even if you do things the right way and defer your loans, put them into forbearance, or enter an income-driven repayment plan, your interest will have continued to accrue, leaving you with a larger balance that you will ultimately have to pay off unless you remain under a certain income threshold.
The Great Escape
There does appear to be a loop-hole that allows debtors to legally evade their loans. It rests on the relatively obscure Foreign Earned Income Tax Exclusion. Income earned in a foreign country under a certain amount by an American citizen is not subject to U.S. taxes. (Income earned as a military or civilian employee of the U.S. government is not excluded.) The foreign earned income will, of course, be subject to the tax laws of the country in which it was earned.
The amount of the foreign earned income exclusion varies from year to year. It is $112,000 in 2022 and is adjusted annually for inflation. If the borrower’s income is below this threshold, their AGI will be zero.
Those wishing to claim this exclusion must be U.S. citizens or permanent residents, and have established bona fide residency or have resided in the foreign country for 330 out of 365 days. Housing costs may also be eligible for exclusion through the Foreign Housing Exclusion. Applicants must fill out IRS form 2555.
Thus, if a debtor is enrolled in an income-driven repayment plan, and has payments based on their adjusted gross income (AGI), they may in fact be able to make payments of $0 because per U.S. tax law they will have made no income. If they choose to remain abroad for 20-25 years, after which their debt will be forgiven, they may actually be able to get out of paying it, though they will be left with a tax debt based on the amount of forgiven debt.
It’s a somewhat extreme strategy to be sure, but it appears to be entirely legal at this point.
Though the outstanding loan balance will be forgiven, including principal and interest, it’s worth noting that the cancellation of debt is treated as income to the borrower. The borrower will owe income tax on the amount of forgiven debt. While it’s true that this amount will likely be much smaller than the student loan debt, the tax obligation can be a financial burden in and of itself.
You may be able to avoid even this hit if you are insolvent, which means that your debts exceed your assets. You will need to file IRS Form 982. See also IRS Publication 4681 for more information on cancelled debt.
Alternately, you may be able to negotiate an offer in compromise with the IRS by filing IRS Form 656.
While this loophole is currently open, consider this: the Australian government recently tightened up its restrictions on these types of activities. So, it may only be a matter of time until the U.S. government does the same.
Current regulations allow the U.S. Department of Education to substitute other measures of income in income-driven repayment plans if the “borrower’s reported AGI does not reasonably reflect the borrower’s current income.” A recent GAO report has drawn attention to the under-reporting of income in income-driven repayment plans.