Hi Heather,
    I will most likely remain on IBR with a partial financial hardship for the full 25 year term, so my understanding with those circumstances is that my interest will not capitalize.  Is that correct?

So considering my interest does not capitalize, after the 25 year term I understand that I will pay taxes on the remaining balance.  My question is will I pay taxes on just the principal or the principal plus the accrued interest?

Thank you for you help!

Unless the law is changed, you’ll pay taxes on principal + interest after 25 years. The IRS considers this to be a “discharge of debt” that is taxable. This poses a real problem for folks who are on the IBR plan because your loan continues to balloon over the years if you aren’t able to pay the interest each month.

Consider finding a job that qualifies for 10-year loan forgiveness under the Public Service Loan Forgiveness Program. The IRS has indicated that discharged loans under this program will not be taxed.