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Several Questions on Spouse’s Student Loans

Total Posts: 1

Joined 2016-10-13

PM

 

Hello -

My wife graduated from chiropractic school with roughly $170K in student loan debt. We have been on a “Pay as You Earn” program. Unfortunately, we accidentally missed the deadline to re-apply. Now, we have re-submitted our new application, and expect there will not be much of an issue. These are Direct Stafford subsidized and un-subsidized loans. At this point in time, we are aiming for 25 year loan forgivenes, unless one of us at some point begins to generate income that can fully pay off the balance.

My questions are as follows:

1) Unfortunately, interest in the amount of $8K capitalized on 10/1 due to our lapse in the PAYE plan. Is there any way to reverse this? Additionally, we were notified that another $10K will capitalize on 11/1. Will that balance not capitalize if we are placed back on PAYE by 11/1? Processing the application takes 7-10 days, so it should be complete prior to 11/1. We have a one-month forebearance so that we do not have to pay the regular payment of $1996/month w/o an income based plan.

2) We were assured that this would simply add one month to loan forgiveness. I just want to confirm that our 25 year forgiveness time period will not reset due to the temporary failure to renew our PAYE application.

3) If we’re going the route of forgiveness, does the capitalized interest matter significantly? From some of what I’ve read on other threads, you seem to indicate it is not that important, since we won’t be paying the majority of the balance anyways.

4) I understand the tax burden we may face in 25 years or so. We are saving accordingly at this time to prepare for that hit, should it come. Is there any update in current legislation that indicates this tax burden may go away at some point down the line, meaning that forgiven student loan debt is not taxable?

Thanks for your time!!

Rank
Rank

Total Posts: 8

Joined 2015-09-09

PM

 

1) A capitalization is just adding the accrued interest to the principal. If they capitalized $8k on 10/1 I don’t understand how they will be able to capitalize another $10k on 11/1, just a month later since you can’t accrue that much interest in 1 month. Is one of these capitalizations to your accounts and then the other to your husband’s accounts?

Requesting a forbearance allows your servicer to capitalize interest. They can capitalize when you fail to recertify and when you exit a forbearance. In the long run you may be better off trying to cancel the forbearance and paying the $1996 if possible.

2) I believe it will not reset.

3,4) The capitalized interest doesn’t really matter but if $18,000 is added to the principal in 25 years that could result in another $31,500 ($18,000 x 7% x 25). If that amount is taxed as income say at 30% when it is forgiven that’s almost $10,000 more you’ll owe.