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REPAYE, Living Overseas, and the "Tax Bomb"
December 15, 2015
3:18 am
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South Korea
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December 15, 2015
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I am a teacher currently living and working in South Korea. Since last year, I haven’t paid taxes in the US because of the Foreign Income Tax Exclusion, which means that my taxable income is zero. I called my lender (mohela), who said that if I enroll in the IBR or the new REPAYE plan, I would be making payments of $0 per month. Some guy on reddit also said so, for what it’s worth:

[Americans] Living overseas + IBR/ICR = No Student Loan Payment from IWantOut

However, I’m worried about the “tax bomb.” It seems that in 25 years (I have grad student loans), I’d be liable to pay taxes on whatever is forgiven of my 70K+ debt, plus all the interest that will have accrued.

Assuming that I spend the next 25 years mostly working overseas, does it make more sense to do the REPAYE plan and save up for the tax bomb (not to mention my retirement), or should I just try to pay down that soul-crushing principal with my ~$30K salary as fast as I can? I could put maybe $1000 to my loans if I lived frugally, or more if I hustled some extra work.

December 16, 2015
8:51 pm
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Indiana
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May 3, 2014
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Great question.

It seems like both options have pretty big downsides.

On possibility that you might want to consider is the chance that the federal government changes policy and decides not to tax forgiven student loan after 25 years. This would take an act of Congress, but there is already some support for the idea. We won’t know what is going to happen because it will still be over a decade before anyone runs into the taxed forgiveness on loans. A lot can happen between now and then.

One other option for you to think about would be to aggressively save your money for the day the “tax bomb” hits. If you go this route, you are prepared for the possibility if you get taxed, but at the same time, you still benefit if the law changes before you get taxed.

Ultimately, the right decision to you may be different than the right decision for someone in the exact same situation. Sometimes these decisions are not purely economic. I’d suggest putting together a few spreadsheets playing out the different scenarios that could happen in the future. Because you have many variables, it is impossible to know exactly how any option will play out, so the best you can do is try to anticipate all the possibilities and put together a plan that has you prepared for whatever comes your way.

December 17, 2015
11:54 pm
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South Korea
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December 15, 2015
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Thank you very much for your considerate answer. It seems that finding the right way will be complex, and perhaps beyond my ability to discern clearly.

Considering this, could you recommend any financial advisors who could answer questions about student loans? When I look online, most of them seem to be concerned with wealth management, not debt management.

Also, I notice that you live in Indiana, which is where I’m from as well, so if I found a good one there, I could probably eventually meet him or her.

December 18, 2015
12:04 am
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Indiana
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Unfortunately, I do not know any financial advisors well enough to be comfortable making any sort of recommendation.

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