Get to know the authorAccess to higher education in the US isn’t cheap. According to recent data, over 45 million Americans have student loan debt, which adds to nearly $1.75 trillion in total debt across the country.
In an effort to reduce Americans’ financial burden (especially as the US is still experiencing high inflation), the Biden administration announced its student loan forgiveness program. Our immediate thought… how might this impact expats?
We’ll answer this and other critical questions in today’s article, including:
- What’s included in Biden’s Student Loan Forgiveness Plan?
- What does the Student Loan Forgiveness Plan mean for expats?
- Will debt forgiveness under the Student Loan Forgiveness Plan be taxable?
What’s included in Biden’s Student Loan Forgiveness Plan?
The nuts and bolts: Americans can cancel up to $10,000 of their federal student debt. Those who received Federal Pell Grants for their education can claim up to $20,000 in debt relief.
To qualify for relief under the Student Loan Forgiveness Plan, you must have earned under a certain income threshold in either 2020 or 2021. Here’s the breakdown based on your US tax filing status:
| Filing Status | Income Threshold |
|---|---|
| Single individuals | $125,000 |
| Married, filing separately | $125,000 |
| Married, filing jointly | $250,000 |
| Heads of household | $250,000 |
How do these thresholds define ‘income’?
The IRS has various tax relief programs, such as the Foreign Earned Income Exclusion (FEIE) to help US expats avoid double taxation. More specifically, the FEIE allows you to exclude around $100,000 ($107,600 for 2020, $108,700 for 2021) from your income. This amount is adjusted each year for inflation.
So, hypothetically speaking… if the FEIE allows American expats to exclude some of their foreign earned income from their US taxable income, can someone earning more than the outlined income thresholds technically be eligible to receive Student Loan Forgiveness?
Let’s bring this to life with an example. Say you’re an expat living in Singapore, and you made $150,000 in 2020 and 2021. Technically with the FEIE, you can exclude approximately $100,000 of your foreign earned income from US taxes. So if your taxable income is $50,000… are you able to apply for Student Loan Forgiveness?
The answer is yes! Because the plan’s income thresholds are based on your adjusted gross income (which is your taxable income after accounting for any deductions and adjustments).
What actions do I need to take if I’m eligible?
To claim the debt cancellation, federal student loan borrowers must apply for relief and report their income. Though the application will be available in several weeks (starting in October 2022), you can sign up for updates on the Department of Education subscription page.
The deadline for applying will be December 23rd, 2023. And according to the White House, “nearly 8 million borrowers may be eligible to receive relief automatically because their relevant income data is already available to the Department.”
While the Department of Education may already have your income information on file (and you may receive the relief automatically), it’s encouraged to file an application regardless if you’re eligible – just to be sure.
Will the Student Loan Forgiveness Plan be taxable?
Typically, when a lender forgives or cancels a debt, the borrower has to pay taxes on the canceled balance. It’s treated as if the loan were some form of income. However, the Biden administration reassured Americans that the student debt cancellation wouldn’t be taxable at a federal level.
When Congress passed the American Rescue Plan in 2021, they included a bill that provided tax exemption to all federal student loan forgiveness through the end of 2025. That said, there’s a possibility that some states will treat student loan forgiveness as a form of taxable income.
That’s because US states don’t always mimic federal laws regarding taxes. According to the Tax Foundation, the following states might apply taxes on student debt cancellation:
- Arkansas
- Minnesota
- Mississippi
- North Carolina
- South Carolina
- Wisconsin
- New York
- Kentucky
- West Virginia
- Virginia
- Massachusetts
- Hawaii
- Idaho
Stay Up to Date With All the Latest Tax News
If you’re a US expat living abroad, keeping track of new US regulations and how they impact you can be challenging.
To catch up, feel free to read some of our latest articles focused on tax news:
