I just have a couple of questions regarding the Income Based Repayment plan.  My understanding is that after 25 years of being in the plan the principal balance will be forgiven.  But my questions concern the interest:

(1) My understanding is that so long as one qualifies for the plan and meets certain conditions (financial hardship etc etc), accrued interest will not be capitalized and thus one won’t encounter a situation where they’re generating compound interest.  Is this correct?
 
(2) After the 25 year period passes and the principal balance is forgiven, what happens to any accrued interest?  Is that also forgiven?

Thank you

1) Yes. You also need to recertify your income every year to prove you have a financial hardship.

2) The accrued interest will all capitalize when the loan is forgiven. You’ll then owe income tax on the total loan amount forgiven.

I don’t think it capitalizes….cancellation of debt AFAIK is not a capitalization event. However, I think on the 1099-c form, there’s a box where it will state how much of the cancelled debt is interest…. A bit unclear as to whether or not the loan servicer would put interest in Box 2, as the IRS states in its instructions to the lender “Enter any interest you included in the canceled debt in box 2. You are not required to report interest in box 2. But if you do, you must also report it in box 3.”