In resubmitting my annual income for my IBR, I came face to face with the reality that my loans accumulate a whopping $700/month in interest. My principal loan debt of $100,000 has ballooned to $150,000, despite my monthly payments (which are well under $700, so that makes sense).

If I continue on my plan, even adjusted to reflect future increased income, I will never be making a dent in my loans let, perhaps not even covering my interest every month. I am self-employed and with kids, am only working part-time.  Which means in the next 24 years I will accumulate $300,000 in interest alone, and not denting my principal, leaving me with a loan balance of around $500,000.

Does this mean that when my loans are forgiven in 24 years I will owe taxes on the ballooned $500,000 balance? If so, doesn’t that just put my right back where I started, owing $100,000 but now to the irs?

Please help! I don’t know if it’s better to stay on my IBR making my minimum monthly payments, which are only $150, or somehow try and pay $1500/month to actually pay my loans off in 10 years, although I have NO idea how I would make that happen. I just don’t want to realize in 24 years I lived my adulthood with massive debt thinking it would be forgiven only to have to deal with it all over again..

Thank you!

if you are accumulating $700 a month in interest alone, that will be around $200,000 of interest after 24 years, so I’m not following where you are getting $500,000 from. If you are paying $150 a month, that means $550 a month in interest, which is $158k interest accumulation. That means a little over $300,000 total that you’d have to pay taxes on if they are forgiven after 24 years. This amount will probably be even much less as your income increases and your payments increase. Stay on IBR…you can always pay more per month if you want to, but if you can’t, at least you’re only accountable for the minimum.

To maintain your current living standards, you’d have to find a job that makes about $25,000k more per year to comfortably pay $1500 a month. It’s not all that out of reach…

your other option is to consider PSLF to get your loans forgiven. That is only an option if your loans and employment are eligible.

If you do have to end up paying taxes after 24 years, you can claim insolvency with the IRS and only have to pay taxes on a portion of the amount. (I believe if you own about 50k of assets, then you’d only have to pay taxes on 50k of the 300k, but I’m no tax expert so I may be wrong on this)

then, there’s the hope that congress will remove the tax requirement in the future.

But won’t her interest accumulation increase each month that it is not paid as the amount owed increases??  Maybe that is where she is getting the higher figure from?

Yes, interest accrues every month and piles higher and higher, but you aren’t charged interest on that accumulated interest unless capitalization has occurred. Therefore, as long as capitalization hasn’t happened, she shouldn’t see an increase of the $700 per month interest charge. Assuming that’s the case,  $150,000 accumulated interest after 24 years is all that will be charged in interest. (factoring in the $150 payment per month that she is already paying)

Under IBR, interest will not be capitalized as long as you have a financial hardship every year you resubmit your paperwork. (and as long as you don’t forget to submit your paperwork.) Changing repayment plans is an event which will trigger capitalization, so I do not recommend it.

Okay, that was my question, thanks for the response.  So capitalization occurs when there is no longer a financial hardship?  For instance: what if in year 19, she no longer has a financial hardship?  Will interest capitalize only on years 20-24 or will it also capitalize for everything before that?

Finally, What other things will make it capitalize? 

You guys are a great help.

If you look at your loans, you’ll see two balances: your principal amount and your accrued interest. You are only being charged interest on the amount listed under principal, and you’ll see your accrued interest balance go up over time. If year 19 comes along you may have $100,000 in principal and let’s say $120,000 in accrued interest. Let’s say you get a great six figure salary job that year and reapply for ibr. You are making too much money to qualify for a financial hardship so your payment will be capped at the original 10 year rate of $1500. At this point, capitalization happens and your account will show $220,000 in principal and $0 in interest accrued. You will from now on be charged interest on $220,000 which is substantially more….so while your new principal won’t change from $220,000, you’ll see your interest accrued balance rising more than twice as fast as before.

Many things can trigger capitalization…. Off the top of my head, switching repayment plans, not submitting your annual ibr paperwork, coming out of a deferment or forbearance (administrative forbearances do not trigger capitalization), consolidating, going into default, etc