Hi Heather,

So my wife and I have been doing 3 years with IBR and we are still not covering interest with IBR payment, even with MFJ and more money earned each year. Since our loan amount is high (200,000k+) it’s likely that we will continue to meet the Partial Financial Hardship requirement which means the interest should remain un-capitalized. My question, will the uncapitalized interest be forgiven and taxed just like the principle?

This is important because if we don’t need to worry about paying tax on un-capitalized interest, then we can just save for the tax on the forgiven principle. If we have to pay tax on forgiven uncapitalized interest then I’m thinking that we should contribute more than the IBR payment to cover interest AND save for the principle PLUS the 3 years of un-capitalized interest has already accrued, a grand total of $305,000 right now.

The savings I don’t mind, because if the law is changed and IBR loan forgiveness deemed tax-exempt we just cash in the savings. But paying more than the IBR payment just to keep uncapitalized interest from accruing takes away from money we could be putting toward our private loan and other stuff like, I don’t know, living a normal life… ;) and if the law is changed we will have wasted that money. Also, I’m reading horror stories about people missing deadlines and getting interest capitalized so maybe we should pay more to keep the loan from growing just in case THAT happens. Apologies if you have answered this question already. I have tried to read all your responses and haven’t seen this particular bit of info. Thanks so much.