I have student loans but my wife does not.  My wife also makes more than me.  Due to our financial situation I feel like Income Based Repayment is best for us as I get started in my career.  My first question is about Income Based Repayment and within it selecting filing taxes Jointly or Separately.  Do you have any recommendations or information on how this operates?  Because choosing the filing jointly option causes her income to be included in the monthly payment calculations our monthly payment would be much higher under IBR if select file jointly then if file separately.  Yes I realize our tax liability could increase due to filing separately; however, the monthly payment savings appear to be so great that it outweighs the additional tax liability.  Second question, a caveat to this same issue, is about the interest that is accruing.  Can you tell me how things work if your monthly payment under IBR does not pay for the interest?  I have read the government pays the unpaid interest for up to 3 years, and after that I assume it gets added to the principal balance.  That said if you stay under IBR for 25 years both the principal and interest are forgiven.  Correct?  Any information you have on this topic or recommendations would be greatly appreciated?  Lastly, is Income Based Repayment a bad or good idea in general?

Thank you

You are absolutely right that it may make sense to file separately, even if you pay more in taxes, because some borrowers have more to gain by reducing their IBR payments than by paying less in taxes.  It’s very person specific, and I urge you to calculate how it affects your individual situation.

Under IBR, your payment might be calculated at less than the interest that is accruing.  But under IBR, your unpaid interest does not get capitalized (or added to the principle of your loan) until you no longer have a “partial financial hardship”, or if you choose to leave IBR.  Yes, both principle and interest can be forgiven.  One note of caution, 25 year IBR forgiveness is taxable as income in the year in which you receive it under current law.

I think IBR is a terrific option for a lot of borrowers with relatively high debt to income ratios.  Bearing in mind that the longer it takes to repay your debt, the more interest you will pay over time.  That said, if you need access to a reduced payment, IBR has advantages like the interest subsidy and 25 year forgiveness.