Foreign Earned Income Exclusion & Student Loans: How it Works

• The Foreign Earned Income Exclusion can reduce your AGI, lowering federal student loan payments under an IDR plan to as little as $0.

• To benefit, you must work abroad and file Form 2555 with your U.S. tax return. Switching to an IDR plan is easy if you’re not already on one.

• The FEIE doesn’t apply to private loans or non-IDR repayment plans, and forgiven loan amounts may still be taxable.

The Foreign Earned Income Exclusion (FEIE) is a U.S. tax rule that lets Americans living and working abroad exclude up to $126,500 of their foreign-earned income from federal taxes in 2024. By lowering your Adjusted Gross Income (AGI) — the number the IRS uses to figure out how much you owe in taxes — the FEIE can also reduce your monthly federal student loan payments. In some cases, it can drop them to $0.

Moving abroad sounds exciting, but figuring out how it impacts your student loans? Not so much. If you’re thinking about relocating, check out our guide on what happens to student loans when you move abroad.

In this guide, we’ll break down how the FEIE works, what counts as foreign-earned income, and how it could shrink your federal loan payments.

Heads up: This strategy works only for federal student loans if you’re on an income-driven repayment (IDR) plan, like SAVE, IBR, or PAYE. If you’re on a Standard or Graduated plan, your payments won’t be affected by the FEIE.

The good news? You can switch to an IDR plan anytime. Just contact your loan servicer and apply. It’s a simple step that lets you take full advantage of this strategy.

By reducing your Adjusted Gross Income, the FEIE can significantly lower your monthly payments under an income-driven repayment plan.

When your AGI drops, so does your payment. In fact, with the FEIE, many borrowers see their payment reduced to $0.

But let’s clarify: What’s an IDR plan?

Think of it like citrus fruit. IDR is the category (like citrus), and plans like SAVE, IBR, and PAYE are the individual fruits (like oranges, limes, and grapefruits).

They all calculate your payments based on your income, family size, and loan balance. The specific plan doesn’t matter here because with the FEIE, they’ll all likely result in a $0 payment.

Related: Income Limits for Income-Based Repayment

Say you’re living abroad and earning $100,000. Thanks to the FEIE, that income might not count toward your AGI for tax purposes. When you recertify your income for your IDR plan, your reduced AGI could drop your payment to $0.

To make it happen, here’s what to do:

1. File Form 2555 with your U.S. tax return to claim the FEIE and lower your AGI.

2. Align your tax filing and IDR recertification timing so your updated AGI gets used to calculate your payment.

3. Work with your loan servicer if they ask for proof of income. This type of proof might include your tax return, documentation of foreign employment, or other supporting documents.

Quick Tip: If your AGI from last year’s tax return is already low (maybe from a prior year of using the FEIE), you can use that instead. Just make sure it meets your servicer’s documentation requirements.

Related: How AGI Affects Student Loans

If you’re planning to use the FEIE to lower your student loan payments, here’s how to make it work:

1. Calculate Your Adjusted Gross Income

Subtract the excluded portion of your foreign-earned income from your total income. For example, if you earned $150,000 abroad and excluded $126,500 under the FEIE, your AGI would drop to $23,500.

To put this into perspective, under the Income-Based Repayment plan with a family size of one:

• Without the FEIE, your payment could be around $1,500 a month based on your full income of $150,000.

• With the FEIE reducing your AGI to $23,500, your payment could drop to $0.

2. Recertify Your Income

Income-driven repayment plans require annual recertification — a process where you update your loan servicer with your current income and family size. This ensures your monthly payment reflects your most up-to-date financial situation.

When recertifying, submit income information that reflects your reduced AGI after applying the FEIE.

• If your tax return reflects the FEIE: Use your most recent tax return as proof of your reduced AGI. This will show your loan servicer the adjusted income used to calculate your payments.

• If your tax return doesn’t reflect the FEIE yet: You can still document your reduced income manually. Provide additional proof, such as foreign pay stubs or a letter explaining how the FEIE impacts your earnings, to demonstrate that your taxable income is lower.

Related: When is Student Loan Recertification Due?

3. Time Your Tax Filing and Recertification

If this is your first year using the FEIE, or your income situation has changed significantly, make sure to align your tax filing with your IDR recertification. This ensures your lower AGI gets factored into your payments.

If last year’s tax return already shows a low AGI (from a prior FEIE year or minimal taxable income), you might rely on that instead. Just ensure the income source meets your loan servicer’s requirements.

4. Communicate with Your Loan Servicer

Be ready to provide documentation if your servicer asks for proof of income. This might include copies of your tax return and supporting documents showing your AGI after applying the FEIE.

If you haven’t filed your tax return yet or it doesn’t reflect the FEIE, document your situation carefully. For example, the IDR application asks whether you have taxable income. If all your foreign income qualifies for the FEIE, you might reasonably answer “no,” as long as you plan to exclude that income.

To avoid mistakes, explain your situation to your servicer and provide proof of foreign employment. If you’re unsure, consult a tax professional or student loan expert.

Foreign-earned income means money you earn from work physically performed in a foreign country.

Qualifying income includes:

• Wages or salary from foreign employers

• Self-employment income earned abroad

• Professional fees for work overseas

• Commissions for work performed in foreign countries

Even if you work for a U.S.-based employer, income qualifies for the FEIE as long as the work is physically performed while living abroad.

For example, if you work remotely for a U.S. company but complete your tasks from another country, that income qualifies.

What Doesn’t Count?

Certain types of income aren’t eligible for the FEIE, including:

• Rental income

• Investment earnings

• Interest and dividends

• Social Security benefits

• Pensions or annuities

To qualify for the Foreign Earned Income Exclusion, you need to meet one of two tests:

1. Physical Presence Test

You must be physically present in a foreign country (or countries) for at least 330 full days during any consecutive 12-month period. For example, if you move to France on June 1 and stay until the following June 1, you meet this test.

What to Keep: Travel records, passports, and other documents that prove you were abroad for the required time.

2. Bona Fide Residence Test

This test is for long-term expatriates. You’ll need to prove you were a bona fide resident of a foreign country for an entire tax year. Examples of what might help demonstrate this include:

• Maintaining a lease

• Paying local taxes

• Securing a residence permit

This test is more flexible, but it also requires more documentation.

To claim the Foreign Earned Income Exclusion, you’ll need to file the right IRS forms:

• IRS Form 2555 (Foreign Earned Income): This is the main form you’ll use to report your foreign-earned income and claim the exclusion. Include it with your annual tax return.

• IRS Form 673 (Statement for Claiming Exemption): If you work for a U.S.-based employer, this optional form lets your employer exclude your income from U.S. tax withholding upfront.

• IRS Form 1040: This standard form reports your total income, deductions, and exclusions. Your AGI on this form should reflect the FEIE to lower your student loan payments under IDR plans.

Quick Tip: Keep detailed records like pay stubs, foreign tax returns, and travel logs. If the IRS asks for proof, these documents will back up your eligibility for the exclusion.

Using the Foreign Earned Income Exclusion comes with potential trade-offs you need to weigh carefully:

1. Interest Accrual: If your monthly payment drops to $0 under an IDR plan, interest will likely keep building up unless your plan offers an interest subsidy. For US expats planning to return to the U.S., this could mean a larger balance later. But if you’re earning under the exclusion threshold and staying abroad permanently, this strategy might still lead to eventual loan forgiveness.

2. Tax Implications of Forgiveness: After 20–25 years on an IDR plan, any forgiven student loan balance is treated as taxable income. Since the FEIE only covers earned income, you can’t use it to lower the tax bill on that forgiven amount. Be ready for a one-time tax hit in the year your loans are forgiven.

3. Impact on Roth IRA Contributions: The FEIE can reduce your AGI to $0, which might make you ineligible to contribute to a Roth IRA. Roth IRA contributions require earned income, so you’ll need to consider alternative retirement savings options.

4. Child Tax Credit: Claiming the FEIE may disqualify you from receiving the Child Tax Credit or Additional Child Tax Credit. These credits provide significant refunds for dependents, so think through how this could affect your finances if you have or plan to have kids.

5. Monitoring Income and Residency: If you’re relying on the FEIE long-term, you’ll need to track your income and residency status closely. Changes in where you live or how much you earn could impact your eligibility and the benefits tied to the exclusion.

The Foreign Earned Income Exclusion can be a powerful tool for cutting your U.S. tax bill and lowering your monthly federal student loan payments through income-driven repayment plans. But it’s not without trade-offs, and navigating how it intersects with student loan forgiveness, retirement planning, and tax credits can be overwhelming.

If you’re a U.S. citizen, permanent resident, or expat juggling foreign income and student loans, we can help.

Schedule a call with one of our student loan experts to see how these strategies could work for your unique financial goals.