Hi Heather,

I had a question in regards to the IBR program. You mentioned in one of your You Tube videos that interest does not capitalize unless you either no longer qualified for the IBR program or opt out of it. My question is, through out the 25 years of re-payment before forgiveness - your balance will decrease significantly (especially given that the interest does not capitalize on top of the balance), will you eventually at the end of the repayment cycle be no longer qualified for the IBR program, and eventually have the interest capitalize?

Thanks-A.L.

Well, actually, your balance doesn’t decrease when you are paying less than the interest that is accruing, even when the interest does not capitalize.  I’ll make up some round numbers to illustrate (these numbers aren’t real).  Say you owe $100,000 and you earn $50,000.  If your calculated IBR payment due was $400, but your interest accrued was $500, then after you make your $400 payment you’d still have a principle balance of $100,000 plus $100 of unpaid accrued interest.  That’s because the payment goes first to interest rather than reducing principle.  Over time, the principle balance stays the same, and the amount of unpaid interest goes up.  If and when the interest capitalizes, it increases the balance on the loan.  Make sense?