I have currently about $121,000 under IBR and my monthly payment is about $485.00.  When I started paying my balance was only about $118,000.  The interest rate is 6.125% so the amount of interest per year is about $7,400 compared to my $5,820 of scheduled payments.  Thus I have a negatively amortized IBR loan, i.e. the loan balance goes up even if I make all the payments as requested.  Some people say that IBR does not allow for negative amortization, but that only applies to certain types of loans, which obviously isn’t my case. 

My question is this—this IBR thing and debt cancellation after 25 years is some kind of new experiment in student loans.  Can I even count on the debt cancellation to be around 20 years from now?  And assuming I make it to the end, I may have a $200,000 balance that goes poof and great, now I have to pay $60,000 in income taxes for debt forgiveness!?  So, knowing all this, should I up my payment to prevent the negative amortization by paying an extra $1600 a year in interest?  Or, would you say it is better to pay off other student loans with the extra cash flow?  Are there any consequences that I should consider that you think I should?

As a side-note, I recently got married and filing my taxes separately will save us a ton of money under IBR!  I could never ever make the payments that they would want me to make (judging by their online calculator) if I filed jointly.  Compare my $485 payment to a $1200 payment!  How many people are making this mistake and declaring bankruptcy as a result?  Also, nice of the government to amend the law in 2007 to allow me to stay married and file my taxes separately. 

If paying as much or more than the interest that is accruing each month is affordable for a borrower, it’s a smart way to minimize the cost of the loan over time.  Only the income driven plans permit borrowers to pay less than the interest that accrues (negative amortization). Negative amortization is absolutely possible in IBR and that’s how it allows for affordable monthly payments in spite of high balances.  But the capitalization rules in IBR help, because unpaid but accrued interest is not added to the principal of the loan unless or until the borrower no longer has a Partial Financial Hardship or chooses to leave the repayment plan.

You are certainly asking the right questions in an effort to decide how to manage your finances.  As far as which student loans to repay first, consider whether you have any private loans that might be at less favorable terms, for example at a variable interest rate and without cancellation provisions.

We are not guaranteed that Congress won’t make changes to these programs, but it is likely that when or if they do, that current borrowers will be subject to the rules that are in place now, and any changes would apply prospectively.  That’s my take.