This article is no longer up-to-date. For the latest information about student loans, please see “The Biden Save Student Loan plan for Expats.”
President Biden just announced that his administration is introducing a Student Loan Forgiveness Plan. According to president Biden, 95% of Student Loan holders will be eligible for student loan forgiveness. Exactly who will qualify to see their debts reduced is based on income level. As an expat, this might immediately be wondering, ‘how will Biden’s Student Loan Forgiveness bill affect expats like me?’ You already know that you can use the Foreign Earned Income Exclusion to exclude over $100,000 from your annual tax return.
Can you use the FEIE to reduce your income level and qualify for student debt forgiveness?
Let’s look closer at the plan to find out.
The plan aims to reduce the economic burden of student loans on income earners making less than $125,000 per year. Anyone making under the $125,000 limit will be eligible to have their student loan debts reduced or entirely eliminated, up to $10,000. Additionally, loan recipients who received federally subsidized Pell Grants will be eligible for an additional $10,000 in forgiveness, for a total of $20,000 of student debt eliminated.
In the Press Conference, President Biden stated that 43 million people would benefit from the new student debt relief program. Additionally, 45% of those eligible will see their debt canceled entirely. How many of those people live outside the United States is not yet clear.
Can expats use the FEIE and exclude a portion of their income and qualify for Student Loan forgiveness?
To find the answer to whether expats can use their FEIE adjusted salary, MyExpatTaxes tax experts looked at the White House Fact Sheet on the subject as it currently stands. It’s still too early to know all of the details about how Biden’s student loan forgiveness will affect Americans abroad, but let’s break it down.
Here’s What We Know so Far About Student Loan Forgiveness for Expats
Student Loan Debt Relief will not be treated as taxable income on your US tax return.
Thanks to the American Rescue plan, any debt relief received will not be considered taxable income when you file your 2022 tax return in 2023.
States could still consider your forgiven debt as taxable
Yup! As this news is just being released, it’s too early to tell how individual states will react. If you’re living abroad but still required to file a state tax return, be sure to take that into consideration!
The relief is not coming from the IRS
In contrast to the IRS’s stimulus payments, the new Student Loan Relief will originate from The Department of Education. After all, only loans granted by the Department of Education are eligible for forgiveness. You may receive Form 1099-C. If you see this form show up in the mail next year, hold on to it. It’s your documentation when it comes time to file your taxes with the IRS.
Some things are still unclear about student loan forgiveness for expats.
Can Americans abroad use the Foreign Earned Income Exclusion to artificially lower their income levels?
Using the FEIE to reduce their income by over $100,000, an expat who makes over the $125,000 limit could be eligible for forgiveness of up to $20,000 of student loans.
Here’s an example of how this could play out:
Bill lives and works in The Netherlands. He earns a salary of roughly $130,000 per year. Bill graduated from college a few years ago and took out Federal Grants to help pay the fees.
Since Bill earns his salary while working in The Netherlands, he uses the FEIE to avoid double taxation. In 2023, he’ll be able to exclude $112,000 from his 2022 tax return. Doing this brings his total income to just $18,000.
If the Student Loan Forgiveness program utilizes Bill’s full income of $130,000 to determine his eligibility, he would not be eligible for the benefit.
However, if the program does take the FEIE into consideration, then Bill is eligible for debt relief.
Right now, all we can say is it’s too soon to tell, but in our opinion, we cannot see why expats using the FEIE shouldn’t be eligible.
What will be considered “income?”
Regarding taxation, income can have a couple of different meanings.
First, there is your Adjusted Gross Income. This is your gross income minus any adjustments. Examples of Gross Income are your salary, pensions, investment income, or business income. And examples of the adjustments are alimony paid, student-loan interest, or educator expenses to name a few. The great news is any income excluded via FEIE is considered in the calculation of your Adjusted Gross Income.
Second, you have your taxable income. Your taxable income is the portion of your income in which you actually have to pay taxes, which is normally your Adjusted Gross Income minus any further deductions like the Standard/Itemized Deductions, additional Charitable Donations, and Qualified Business Income Deduction.
Until the Biden Administration or the Department of Education specifies which form of income will be considered, we won’t know who will be eligible for Student Debt Forgiveness.
Most Expats Won’t have to Worry
In his address, President Biden shared that the vast majority (90%) of the eligible beneficiaries in the US and abroad make under $75,000 annually. This means they will easily qualify for debt relief without worrying about how their expat status could affect them.
MyExpatTaxes will Always Maximize Your Savings
With MyExpatTaxes, you know that we will always do everything possible to make sure that you pay the least taxes and get the best refunds possible. Why? Because we’re expats just like you. We’ve taken out student loans and claimed the FEIE and Foreign Tax Credits. After all, we started MyExpatTaxes to help others just like ourselves!