Hello Heather,

I just consolidated my federal loans and am repaying under IBR. Of course, my monthly payment does not cover all of the interest that accrues on my loans. I realize that any unpaid interest will be capitalized, but I can’t afford to pay all of the interest before it is capitalized on my small, state government salary. I am a staff attroney for a state agency and plan to apply for PSLF after my 120 months of payments are complete. At that point, is the entire balance of my loans eligible for forgiveness, including unpaid interest that has been capitalized? If not, do you have any suggestions to manage my interest payments?

Thank you for your help.

Alyson

What up akenned7?

The interest capitalization rules under IBR are special.  If an IBR payment amount does not cover the full amount of interest that accrues on loans each month, the government will pay any unpaid, accrued interest on subsidized loans for up to three consecutive years from the date repayment begins under IBR.

Capitalization (or adding that unpaid accrued interest to the principal balance of the loan) does not occur unless the borrower no longer has a Partial Financial Hardship or chooses to leave IBR.  Capitalization is bad, because then borrowers are charged interest on interest. 

At some point, all the accrued interest and principal has to either get repaid or forgiven.  Maybe it’s repaid by the borrower over time or the borrower earns loan forgiveness.  If a borrower earns loan forgiveness, the interest AND principal are forgiven.