Hi Heather. Thank you so much for your excellent insights and clarification—this website is a goldmine!

I have two questions about PAYE for you.

(1) I found a post you wrote in January, which states that unpaid PAYE interest doesn’t capitalize for the first three years on subsidized loans—what about unsubsidized loans?(http://askheatherjarvis.com/blog/pay-as-you-earn-hotter-than-IBR#sthash.oNc1LgUM.dpuf). I am in grad school, so unfortunately I am only eligible for unsubsidized loans. If that does apply to unsubsidized loans,  am I right to understand that the loan would *not* grow during those three years, even though you would likely not be paying off your interest each year?

Also, you said: “Under PAYE only, capitalization of interest is limited to 10 percent of the original balance.” Is that true for unsubsidized loans? Does that limitation only start after you graduate, or during school as well? With unsubsidized loans, that interest really builds up fast while you’re in school (e.g. for my husband, he will likely accrue something $20k in interest, on about $180k in loans, all before graduation), so it would be amazing if the 10% capitalization limit applied to interest growth during school years as well (e.g. in my husband’s case, his loan could not have any more interest capitalize after graduation, based on the numbers I gave).

For example, to make sure I’m understanding, that would mean that for a loan of $200k, no more than $20k could be added to the loan, total, over 20 years- is that right?

(2) Because the PAYE payments tend to be so small, the remaining loan after 20 years could still be quite large. This could make the taxes on the forgiven loan quite formidable (especially if unpaid interest does capitalize, which would allow the loan to grow immensely). According to the student aid website, someone on PAYE “may” have to pay taxes on the loan that is forgiven. (A) Do you know if there has been any clarification as to what “may” means? Is it possible that someone might not have to pay taxes, even if they’re not in public service? (B) Do you know of any efforts to change the laws, and eliminate the taxation of forgiven debt? It just seems to defeat the purpose of providing a manageable repayment plan, if in the end, a $200k loan forgiveness requires you to pay about $80k in taxes in one year (Never mind if the interest capitalizes, which would turn the loan into $500-$600k, and approx. $200k in taxes).

Any insights or suggestions as to how we can support a policy change would be most welcome.