Another IBR/ PAYE question about interest

[r3pnit]

I will start the PAYE plan or IBR plan. My monthly payments do not cover the interest. Therefore what happens to the interest I am not covering. Does it accumulate and add to my principal balance. I was reading this:

Under IBR, unpaid interest is capitalized (added to your loan principal balance) only if you are determined to no longer have a “partial financial hardship,” or if you choose to leave the IBR Plan.

so as long as I am in IBR/ PAYE it wont be added on? But in this case. then my principable balance would stay the same for 20-25 years?

Then I was reading something about how goverment only covers direct SUBsidized loan interest for the first 3 years. I'm confused on which one it is?


So i'm confused. Does the prinicpal balance stay the same if I keep making IBR payments that don't cover my interest. In that case the principal balance I have now will be the amount forgiven? Though I still will have to pay tax on that ?


edit:

I forgot to mention my salary will always be around 90-110k . I am in a physician assistant. My IBR payements will never be more than my 10 years plan payments so I plan on being in IBR / PAYE plan for the 20 years

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[RangerBob]

While in IBR, your principle remains the same (assuming you're IBR payments don't cover interest and more, in which case you'd be paying down your principle). If your IBR payments don't cover the interest that accrues, the government will pay for whatever interest accrues on your subsidized loans (and only subsidized loans) for three years. Your interest just stays in limbo and is never capitalized, as long as you're still in IBR (but of course, your principle will keep accruing interest, adding that that pool of money in limbo). If you leave IBR (start making too much to qualify for the partial economic hardship) then your interest will be capitalized at that point. Note, this includes forgetting to reapply for IBR! (Because you would then be switched to the standard plan--so always be sure to apply on-time). It's entirely possible that if you don't expect your income to go up by much that your interest will never capitalize again.

Of course, I'd encourage you to make more than the minimum payment so that you can pay off your loans sooner, since your salary will presumably allow for it. Currently any loans forgiven at the end of 20 years (for PAYE) or 25 years (IBR) are taxed. It's entirely possible, depending on how much you owe, that you'll actually pay more money back because of that. And it's also entirely possible that the government will nix the loan forgiveness portion, which is what a lot of people are nervous about. If your payments aren't covering the interest, I would seriously reconsider paying the minimum, as you could potentially be left with more loans in 20 years than you have right now should Congress decide to do away with the forgiveness portion (or limit the amount) of IBR/PAYE. Of course, if it stays around (and if they change the law so forgiveness is tax-free) that'd be a huge benefit. So it's a bit of a gamble.

 

[r3pnit]

the foregivness loan that is taxes at the end after 20 years for PAYE... will that include the accured interest that was sitting in limbo?

 

[Postictal Raiden]

While in IBR, your principle remains the same (assuming you're IBR payments don't cover interest and more, in which case you'd be paying down your principle). If your IBR payments don't cover the interest that accrues, the government will pay for whatever interest accrues on your subsidized loans (and only subsidized loans) for three years. Your interest just stays in limbo and is never capitalized, as long as you're still in IBR (but of course, your principle will keep accruing interest, adding that that pool of money in limbo). If you leave IBR (start making too much to qualify for the partial economic hardship) then your interest will be capitalized at that point. Note, this includes forgetting to reapply for IBR! (Because you would then be switched to the standard plan--so always be sure to apply on-time). It's entirely possible that if you don't expect your income to go up by much that your interest will never capitalize again.

Of course, I'd encourage you to make more than the minimum payment so that you can pay off your loans sooner, since your salary will presumably allow for it. Currently any loans forgiven at the end of 20 years (for PAYE) or 25 years (IBR) are taxed. It's entirely possible, depending on how much you owe, that you'll actually pay more money back because of that. And it's also entirely possible that the government will nix the loan forgiveness portion, which is what a lot of people are nervous about. If your payments aren't covering the interest, I would seriously reconsider paying the minimum, as you could potentially be left with more loans in 20 years than you have right now should Congress decide to do away with the forgiveness portion (or limit the amount) of IBR/PAYE. Of course, if it stays around (and if they change the law so forgiveness is tax-free) that'd be a huge benefit. So it's a bit of a gamble.

Some part of me wishes that the taxation thing remain because then it will be too good to be true.

 

[RangerBob]

the foregivness loan that is taxes at the end after 20 years for PAYE... will that include the accured interest that was sitting in limbo?

I don't know--but I imagine it includes the entire amount forgiven, principle plus accumulated interest, as I believe it's all taxed as income. So you may be paying close to 30-40% taxes on what's forgiven. If I'm wrong, hopefully someone can correct me.

 

[RangerBob]

Some part of me wishes that the taxation thing remain because then it will be too good to be true.

I think that's the main hope for the forgiveness sticking around--if it gets taxed, the government probably makes more money off most people than if everyone repaid their loans normally. I'm sure they will lose money on a few, but a lot of people will be needlessly extending their repayment and then get hit by the "tax bomb." And I think on average the government would come out ahead. So that's one thing in my mind the program has going for it as far as why it might remain. If the tax bomb disappears, I don't think the forgiveness portion is as likely to remain, but that's just my opinion.

 

[Postictal Raiden]

I think that's the main hope for the forgiveness sticking around--if it gets taxed, the government probably makes more money off most people than if everyone repaid their loans normally. I'm sure they will lose money on a few, but a lot of people will be needlessly extending their repayment and then get hit by the "tax bomb." And I think on average the government would come out ahead. So that's one thing in my mind the program has going for it as far as why it might remain. If the tax bomb disappears, I don't think the forgiveness portion is as likely to remain, but that's just my opinion.

Then what do you think will happen if the forgiveness thing goes away? People will be responsible to take another loan to pay off their remaining balance of federal debt? or the government will extend the repayment plan indefinitely?

 

[r3pnit]

I can't imagine them getting rid of PAYE or IBR. to many people would be coming out with lawyers that worked hard for years using these payment plans when tgey could of easily used other payments plans.


who can I call or speak to to ask if the foregivness loan that is taxes at the end after 20 years for PAYE... will that include the accured interest that was sitting in limbo?

It seems like no one knows this answer and I want to get down to the answers

 

[r3pnit]

Another thing i forgot to mention is it states that capitalized interested is maxed at 10% of original loan. Which is a huge benefit for PAYE

Another great feature of this loan is that interest will never capitalize above 10% of the original loan amount. This could make a big difference down the road for a college grad. Let’s imagine that you have a total loan debt coming out of college of $35,000. As you pay this off over the next 20 years, the max amount of interest that can be capitalized, or added to the amount of the loan, would be only $3,500.


therefore there is a max that can be taxed at the end? If you can't exceed 10% of your capitalized interest

 

[Postictal Raiden]

Do you mean that the maximum amount forgiven, and taxable, will be the 110% of the principle? That's not so bad imo

 

[r3pnit]

^^ that is what I'm trying to figure out after reading that statement about the max interest can only be 10%. I'm wondering the same as you

 

[sazerac]

Capitalizing interest simply refers to whether or not you can grow interest on your interest. If you have a loan of 200,000 at 1% and the interest does NOT capitalize and you make no payments on the loan, then you will accrue 2,000 of interest the first year and then 2,000 of interest the next year. You would not accrue 2,020 of interest the second year, because the interest has not capitalized.

There is this rumor going around that capitalized interest does not have to be paid back or something. I don't know where this rumor came from, and it is quite incorrect. The total amount that needs to be paid off is 200,000 the first year, 202,000 the second, and 204,000 the third year. Just because the interest does not itself grow interest does not remove the obligation to pay it.

If the loan were forgiven via PAYE at the end of year two, then you would have to declare 204,000 of income as a taxable event.

I'm intrigued by this 10% limit, that's news to me and I would like to hear more about it.

 

[Postictal Raiden]

Capitalizing interest simply refers to whether or not you can grow interest on your interest. If you have a loan of 200,000 at 1% and the interest does NOT capitalize and you make no payments on the loan, then you will accrue 2,000 of interest the first year and then 2,000 of interest the next year. You would not accrue 2,020 of interest the second year, because the interest has not capitalized.

There is this rumor going around that capitalized interest does not have to be paid back or something. I don't know where this rumor came from, and it is quite incorrect. The total amount that needs to be paid off is 200,000 the first year, 202,000 the second, and 204,000 the third year. Just because the interest does not itself grow interest does not remove the obligation to pay it.

If the loan were forgiven via PAYE at the end of year two, then you would have to declare 204,000 of income as a taxable event.

I'm intrigued by this 10% limit, that's news to me and I would like to hear more about it.

Check out this link http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn

Scroll down and read the third bullet point under "Advantages of Pay as You Earn". Also, on the right side, they defined the term Capitalization as "The addition of unpaid interest to the principal balance of a loan. When the interest is not paid as it accrues during periods of in-school status, the grace period, deferment, or forbearance, your lender may capitalize the interest. This increases the outstanding principal amount due on the loan and may cause your monthly payment amount to increase. Interest is then charged on that higher principal balance, increasing the overall cost of the loan." From what I understood, a maximum of 10% of the accrued unpaid interest will be added to the principle debt. Therefore, in the scenario you've given above, the maximum debt one would accumulate after 20 years of PAYE, and assuming that the monthly payment didn't cover the accrued interests, is X + 0.1X (X being the principle amount).

 

[sazerac]

Check out this link http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn

Scroll down and read the third bullet point under "Advantages of Pay as You Earn". Also, on the right side, they defined the term Capitalization as "The addition of unpaid interest to the principal balance of a loan. When the interest is not paid as it accrues during periods of in-school status, the grace period, deferment, or forbearance, your lender may capitalize the interest. This increases the outstanding principal amount due on the loan and may cause your monthly payment amount to increase. Interest is then charged on that higher principal balance, increasing the overall cost of the loan." From what I understood, a maximum of 10% of the accrued unpaid interest will be added to the principle debt. Therefore, in the scenario you've given above, the maximum debt one would accumulate after 20 years of PAYE, and assuming that the monthly payment didn't cover the accrued interests, is X + 0.1X (X being the principle amount).

I read your very informative link.

So if you are sitting on your hands and not paying interest at all, for instance because you are a student or your decide to do forbearance during residency or you are in the grace period, then interest will capitalize. That is, interest will be added to the principle and it will continue to grow interest on interest.

If you are making PAYE-sized payments, then interest will not capitalize. The interest will accumulate and it will need to be paid off, but it is as if this interest is in a special holding pen, in a 0% loan if you will. You gotta pay it off, but it is not capitalized yet.

If you are making very big bucks and the normal 10 year plan is less than the PAYE 10% of income, then your payments switch to the 10 year plan and interest capitalizes as it would in any ordinary loan from a bank.

Finally, apparent the maximum amount of interest that is allowed to capitalize is 0.1X of your loan.

But like I have always said, you will have to pay off (or get forgiven) all of your interest, whether it capitalizes or not. Let's not for a second think that the amount you have to pay back is limited to 1.1X because that would be incorrect.

 

[RangerBob]

I read your very informative link.

So if you are sitting on your hands and not paying interest at all, for instance because you are a student or your decide to do forbearance during residency or you are in the grave period, then interest will capitalize. That is, interest will be added to the principle and it will continue to grow interest on interest.

If you are making PAYE-sized payments, then interest will not capitalize. The interest will accumulate and it will need to be paid off, but it is as if this interest is in a special holding pen, in a 0% loan if you will. You gotta pay it off, but it is not capitalized yet.

If you are making very big bucks and the normal 10 year plan is less than the PAYE 10% of income, then your payments switch to the 10 year plan and interest capitalizes as it would in any ordinary loan from a bank.

Finally, apparent the maximum amount if interest that is allowed to capitalize is 0.1X of your loan.

But like I have always said, you will have to pay off (or get forgiven) all of your interest, whether it capitalizes or not. Let's not for a second think that the amount you have to pay back is limited to 1.1X because that would be incorrect.

This sounds exactly right to me. You will have to pay back all the interest that accrues--the only benefit is that if you do leave PAYE (otherwise your interest doesn't capitalize), then the amount of your interest that can be capitalized is limited, but you still owe all the other interest that accrued--it's just not capitalized.

Once again, I think it's a big recipe for disaster to not even pay off the interest that accrues each year. For new borrowers out there, I would only consider medical school (or any degree) if you can, and plan to, pay everything back in full. We can't assume the government forgiveness programs will still be around. For one thing, they will most likely cause tuition inflation, which will need to be addressed at some point in the future. To my understanding only the IBR/PAYE monthly payment portions are in the MPN (the contract you signed with the government). I don't know about forgiveness, it could be (I'd have to check, and I can't right now). If it's not, then it's definitely something that could be done away with. If it is, I still wouldn't be surprised if the government is able to get rid of it as well, legally. They did get rid of the ability to discharge your student loan debt in bankruptcy back in the 80's/early 90's. They've made tons of changes to loan programs lately.

Even if forgiveness does stick around, that'd be a huge, huge, tax payment to make. If you're loans, with interest, snowball above ~400k then your federal tax rate is about 40% on anything above that (so you're probably looking at about 30-35% federal taxes on everything). Plus you have state taxes. You might even have to pay FICA taxes (if the forgiveness is treated as 1099-reportable income), in which case you could be looking at taxes of about 50%. So the best case scenario would probably be 30% (federal taxes only, no state income tax or FICA, etc.), so you can see why you might actually pay more than if you pay the loans off quicker and without forgiveness. This is also why consulting a tax lawyer and adviser would be advisable to anyone getting close to forgiveness. I'd encourage the OP and anyone who plans to make less-than-interest payments for the lifetime of the loan to actually consult professionals now, since it could drastically impact whether it makes sense for you to implement that payment plan.

Borrow as little as you can (I wish I had tried harder on this myself, now that I'm in repayment). Live like a resident for a few years as an attending to front-load repayment (easy to say, harder to do. But it's much easier earlier in your life than later). If you think you will be taking 20-25 years to pay off your loans, then make sure you're making more than the minimum payment so that in the event forgiveness goes away, you aren't left with more loans than you had in the first place (ie, consider paying a monthly payment that would pay off your loans in 25-30 years).

 

[r3pnit]

thanks for the info.

But that does not clarify this statement about the 10% capitalized interest

"Another great feature of this loan is that interest will never capitalize above 10% of the original loan amount. This could make a big difference down the road for a college grad. Let’s imagine that you have a total loan debt coming out of college of $35,000. As you pay this off over the next 20 years, the max amount of interest that can be capitalized, or added to the amount of the loan, would be only $3,500."

Why is everything so unclear about student loans and the future. I feel like they need to start working on more clears laws and solidify things. The student loan bubble is about to burst and most people don't understand what exactly is going on. Is there someone you can call to find out the exact details

 

[sazerac]

thanks for the info.

But that does not clarify this statement about the 10% capitalized interest

"Another great feature of this loan is that interest will never capitalize above 10% of the original loan amount. This could make a big difference down the road for a college grad. Let’s imagine that you have a total loan debt coming out of college of $35,000. As you pay this off over the next 20 years, the max amount of interest that can be capitalized, or added to the amount of the loan, would be only $3,500."

Why is everything so unclear about student loans and the future. I feel like they need to start working on more clears laws and solidify things. The student loan bubble is about to burst and most people don't understand what exactly is going on. Is there someone you can call to find out the exact details

Again, all this is saying that the amount of interest that is allowed to capitalize (i.e. earn interest on interest) is limited to 10% of your original loan. All of the other interest is uncapitalized. This uncapitalized interest still exists. This uncapitalized interest still needs to be paid off. It just sits in a special bank account that itself earns 0% additional interest.

Capitalized interest is like every other interest in the world - it gets added to the principle and earns interest itself and it grows in a snowball exponential rate. Car loans, house loans, private loans, etc all work like this. Usually this is not even an issue because the loan payment is usually set to be larger than the interest rate so there is never unpaid interest to capitalize.

Uncapitalized interest is very special and unique. It does not grow interest itself. It simply sits there BUT IT STILL NEEDS TO BE PAID OFF.

Taking your example, let's say you had a $35,000 loan that was at 1% per month, and you never made a payment. After a while your total loan balance was now $100,000. Your balance would look like:

$35,000 principle (at 1%)
$3,500 capitalized interest (at 1%, limited to 10% of principle)
$61,500 uncapitalized interest (at 0% because it is uncapitalized)
=====
$100,000 TOTAL loan balance

If you paid off you loan in full (or had it forgiven in full) then $100,000 would need to be paid to the lender.

If you didn't make another payment again, how much would your next monthly interest be?
$350 ($35,000 principle at 1%)
$35 ($3,500 capitalized interest at 1%)
$0 ($61,500 uncapitalized interest at 0%)
=====
$385 TOTAL interest generated that month

Since your capitalized interest is already at the 10% maximum in this example, your new loan balance would look like:

$35,000 principle (unchanged, you haven't done any new borrowing)
$3,500 capitalized interest (unchanged, limited to 10% of principle)
$61,885 uncapitalized interest (additional interest shows up here)
=====
$100,385 TOTAL loan balance

 

[r3pnit]

^^ but in PAYE plan there is no capitalized interest correct? Therefore it is all Uncapitalized and you have your principle.


Is there a number you can call to speak to someone about PAYE.

The thing about PAYE or IBR , is for a lot of people, their payments don't even cover the interest

 

[Postictal Raiden]

Again, all this is saying that the amount of interest that is allowed to capitalize (i.e. earn interest on interest) is limited to 10% of your original loan. All of the other interest is uncapitalized. This uncapitalized interest still exists. This uncapitalized interest still needs to be paid off. It just sits in a special bank account that itself earns 0% additional interest.

Capitalized interest is like every other interest in the world - it gets added to the principle and earns interest itself and it grows in a snowball exponential rate. Car loans, house loans, private loans, etc all work like this. Usually this is not even an issue because the loan payment is usually set to be larger than the interest rate so there is never unpaid interest to capitalize.

Uncapitalized interest is very special and unique. It does not grow interest itself. It simply sits there BUT IT STILL NEEDS TO BE PAID OFF.

Taking your example, let's say you had a $35,000 loan that was at 1% per month, and you never made a payment. After a while your total loan balance was now $100,000. Your balance would look like:

$35,000 principle (at 1%)
$3,500 capitalized interest (at 1%, limited to 10% of principle)
$61,500 uncapitalized interest (at 0% because it is uncapitalized)
=====
$100,000 TOTAL loan balance

If you paid off you loan in full (or had it forgiven in full) then $100,000 would need to be paid to the lender.

If you didn't make another payment again, how much would your next monthly interest be?
$350 ($35,000 principle at 1%)
$35 ($3,500 capitalized interest at 1%)
$0 ($61,500 uncapitalized interest at 0%)
=====
$385 TOTAL interest generated that month

Since your capitalized interest is already at the 10% maximum in this example, your new loan balance would look like:

$35,000 principle (unchanged, you haven't done any new borrowing)
$3,500 capitalized interest (unchanged, limited to 10% of principle)
$61,885 uncapitalized interest (additional interest shows up here)
=====
$100,385 TOTAL loan balance

Now I get it. I thought that only 10% of the entire accrued interests during the repayment will be added to whatever left over of the principle, and that amount will be taxable forgiven.

So, for someone like me, who is projecting to finish medical school with a debt of 480K and may enter a specialty that requires 6 years of residency, the taxable amount may be huge. During residency, my principle debt will accrue an interest amount of 30K per year. Due to my family size, my monthly repayment amounts will only add up to ~3K a year. That leaves 27K of unpaid interests. 6 years later, the unpaid uncapitalized interests will grow to 160K. After residency, let's assume my salary would be 330K (that's a good assumption because 330 in 2024 is ~250 in 2014). My annual repayment amount would be 30K just enough to cover the interests. 14 years later, my principle remains the same, 480K, and my total forgiveness AND taxable amount will be 480K (principle) + 160K (accrued interests in residency) + 16K (the maximum allowed capitalization) = 656K.

For all our purposes, let's assume a 40% tax rate. This means that in 2025 I will need to cut a check to the IRS in the amount of 263K. In other words, I will need to set a side 18K a year for the 14 years following residency to have this amount saved for the tax bomb. All in all, my total repayment for the 480K that I will graduate with will be ~700K. This is very comparable to what I would pay if I engage in the standard 10-year plan right after graduating medical school. Except, it is much more affordable since I won't have to deal with hefty monthly payments during residency.

Like this, everyone is happy; me for making affordable payments, Uncle Sam for making 220K in profit over 20 years, and the school for charging me an outrages amount of tuition. Long live America!

 

[r3pnit]

Now I get it. I thought that only 10% of the entire accrued interests during the repayment will be added to whatever left over of the principle, and that amount will be taxable forgiven.

So, for someone like me, who is projecting to finish medical school with a debt of 480K and may enter a specialty that requires 6 years of residency, the taxable amount may be huge. During residency, my principle debt will accrue an interest amount of 30K per year. Due to my family size, my monthly repayment amounts will only add up to ~3K a year. That leaves 27K of unpaid interests. 6 years later, the unpaid uncapitalized interests will grow to 160K. After residency, let's assume my salary would be 330K (that's a good assumption because 330 in 2024 is ~250 in 2014). My annual repayment amount would be 30K just enough to cover the interests. 14 years later, my principle remains the same, 480K, and my total forgiveness AND taxable amount will be 480K (principle) + 160K (accrued interests in residency) + 16K (the maximum allowed capitalization) = 656K.

For all our purposes, let's assume a 40% tax rate. This means that in 2025 I will need to cut a check to the IRS in the amount of 263K. In other words, I will need to set a side 18K a year for the 14 years following residency to have this amount saved for the tax bomb. All in all, my total repayment for the 480K that I will graduate with will be ~700K. This is very comparable to what I would pay if I engage in the standard 10-year plan right after graduating medical school. Except, it is much more affordable since I won't have to deal with hefty monthly payments during residency.

Like this, everyone is happy; me for making affordable payments, Uncle Sam for making 220K in profit over 20 years, and the school for charging me an outrages amount of tuition. Long live America!

Ha im sticking this brother. with PAY, if I pay the interest amount. my loan foregivness wont change from my principal. So it will be around 206,000 when i graduate. I am not a physician like you, I am a physician assistant, therefore much different situation. I will always be in PAYE or income based payment because my IBR will never be more than my 10 years plan. Therefore at the end I will get taxed 206,000 for student loans + my salary, (lets say 100-110k). a total of 306k, taxed at 39% for married but filing seperate would be aorund 93k , subtracted from the 18-20k I pay in taxes would be around 75k

 

[Postictal Raiden]

Ha im sticking this brother. with PAY, if I pay the interest amount. my loan foregivness wont change from my principal. So it will be around 206,000 when i graduate. I am not a physician like you, I am a physician assistant, therefore much different situation. I will always be in PAYE or income based payment because my IBR will never be more than my 10 years plan. Therefore at the end I will get taxed 206,000 for student loans + my salary, (lets say 100-110k). a total of 306k, taxed at 39% for married but filing seperate would be aorund 93k , subtracted from the 18-20k I pay in taxes would be around 75k

I hear you, but that doesn't change the fact that our projected debt will equal to twice the salary we receive. Besides, unlike you, my payments during residency will not cover the accruing interests, not even a quarter of it.

I think you are forgetting that your income will grow by ~2-3% a year for the next 20 years. At the end of your repayment plan, when you get hit with the tax bomb, your salary will be at least 170K. If I were you, I would set aside 4K/year to payoff the taxes on the forgiven amount.

 

[r3pnit]

I plan on setting 4-5k, Personally I don't think in 20 years PA salary is going to go up to 170k. If thats the case, the gastroenterologist I work for would be making 1mill. All salaries have their max. Granted if my salary does increase to 170k in 20 years. I wont turn it down, haa. I would always be in the IBR because I would need to make 200k or so for my payments to be more than my 10 year plan

 

[sazerac]

^^ but in PAYE plan there is no capitalized interest correct? Therefore it is all Uncapitalized and you have your principle.


Is there a number you can call to speak to someone about PAYE.

The thing about PAYE or IBR , is for a lot of people, their payments don't even cover the interest

In PAYE interest will capitalize when you are not making PAYE-sized payments. When does this occur? When you are a student. If you defer / forebear during residency. If you are making really really big bucks as an attending and switch to the 10 year plan because it is cheaper.

In PAYE interest will not capitalize when you do make PAYE-sized payments. When does this occur? If you choose to make microscopic payments in residency. If you are a normal attending with a big loan and you can stay on the PAYE payment plan as an attending.

Why don't you go on over to the AAMC website and then in their loan calculator you can enter your loans, your projected resident salary, and your projected attending salary. You can play with repayment scenarios in there until you are blue in the face.

 

[r3pnit]

^^^ I'm not a physician I think thats what your mis understanding. My IBR payment would not be over 10 year payment ever. I am a physician assistant.

you just said: "In PAYE interest will not capitalize when you do make PAYE-sized payments."


But when you pay loan foregivness, all that interest that was not capitalizing under PAYE will be added to the foregiven loan that is taxable correct?

 

[r3pnit]

Capitalizing interest simply refers to whether or not you can grow interest on your interest. If you have a loan of 200,000 at 1% and the interest does NOT capitalize and you make no payments on the loan, then you will accrue 2,000 of interest the first year and then 2,000 of interest the next year. You would not accrue 2,020 of interest the second year, because the interest has not capitalized.

There is this rumor going around that capitalized interest does not have to be paid back or something. I don't know where this rumor came from, and it is quite incorrect. The total amount that needs to be paid off is 200,000 the first year, 202,000 the second, and 204,000 the third year. Just because the interest does not itself grow interest does not remove the obligation to pay it.

If the loan were forgiven via PAYE at the end of year two, then you would have to declare 204,000 of income as a taxable event.

I'm intrigued by this 10% limit, that's news to me and I would like to hear more about it.

where did you here this? anywhere to look up this rumor? it makes since because when your making payments it doens't show any interest that is capitalized. So ask for loan forgiven you just have your capitalized loan sitting there.. I find it hard that all of sudden they send you a bill with your capitalized loan and principle when you didn't see this all the 20 years you werent paying

 

[sazerac]

^^^ I'm not a physician I think thats what your mis understanding. My IBR payment would not be over 10 year payment ever. I am a physician assistant.

you just said: "In PAYE interest will not capitalize when you do make PAYE-sized payments."


But when you pay loan foregivness, all that interest that was not capitalizing under PAYE will be added to the foregiven loan that is taxable correct?

Well you could still use our most excellent loan tool. Just put in a 20 year residency. Or a 0 year residency. Or make your residency and attending salaries the same. You will get the same results.

Whether your interest is capitalized or not, your interest is still part of your loan and somebody needs to pay it off. If your loan is forgiven then the principle will be forgiven, the capitalized interest will be forgiven, and the uncapitalized interest will be forgiven. Each of these three is a taxable payment to you and shows up as income on your taxes.

 

[sazerac]

where did you here this? anywhere to look up this rumor? it makes since because when your making payments it doens't show any interest that is capitalized. So ask for loan forgiven you just have your capitalized loan sitting there.. I find it hard that all of sudden they send you a bill with your capitalized loan and principle when you didn't see this all the 20 years you werent paying

Please stop perpetuating the SDN rumor that some of the interest in a loan in PAYE repayment does not exist.

The principle of your loan needs to be paid off or forgiven.

The capitalized interest of your loan needs to be paid off or forgiven.

The uncapitalized interest of your loan needs to be paid off or forgiven.

No matter how many times we discuss it or analyze it from another angle, via the PAYE repayment system all principle and all kinds of interest on a student loan must be either paid off by you, or forgiven and then taxed as income to you.

 

[Postictal Raiden]

I plan on setting 4-5k, Personally I don't think in 20 years PA salary is going to go up to 170k. If thats the case, the gastroenterologist I work for would be making 1mill. All salaries have their max. Granted if my salary does increase to 170k in 20 years. I wont turn it down, haa. I would always be in the IBR because I would need to make 200k or so for my payments to be more than my 10 year plan

In 2024, 170K will have the same purchase power as 105K today. The US dollar loses its value at a rate of ~2% every year, so salaries have to go up to compensate for this.

 

[sazerac]

In 2024, 170K will have the same purchase power as 105K today. The US dollar loses its value at a rate of ~2% every year, so salaries have to go up to compensate for this.

As an aside, the AAMC loan repayment calculator even takes this into account, giving you a small raise each year.

Definitely worth a visit, for anybody reading this thread!

 

[Postictal Raiden]

As an aside, the AAMC loan repayment calculator even takes this into account, giving you a small raise each year.

Definitely worth a visit, for anybody reading this thread!

Yup. I was just toying with it. Looks like my total forgiveness amount will be in the neighborhood of 600K. Thus my tax bomb will be ~250K . The good thing though, is that in 2028, 20 years after my graduation, 250K won't be as a huge of an amount as it is today. Still, that's worth considering and saving for.

 

[RangerBob]

In PAYE interest will capitalize when you are not making PAYE-sized payments. When does this occur? When you are a student. If you defer / forebear during residency. If you are making really really big bucks as an attending and switch to the 10 year plan because it is cheaper.

In PAYE interest will not capitalize when you do make PAYE-sized payments. When does this occur? If you choose to make microscopic payments in residency. If you are a normal attending with a big loan and you can stay on the PAYE payment plan as an attending.

Why don't you go on over to the AAMC website and then in their loan calculator you can enter your loans, your projected resident salary, and your projected attending salary. You can play with repayment scenarios in there until you are blue in the face.

I would just add that you can make additional payments above and beyond the IBR/PAYE payment, while remaining in the program and retaining the repayment benefits.

My wife and I have quite a bit of debt between the two of us. My IBR payments in residency don't come close to paying off my interest accrued each year (which as mentioned, will be in limbo). I am, however, paying $10,000-$30,000 per year on my highest-interest loans to try and start shaving down my loans (though they will likely still grow because of interest accruing). I am not going into a high-paying specialty, and thus I will still be eligible for IBR when I am making an attending salary. At that point I'll still make the monthly IBR payment. But I will apply a LOT of my additional income towards quickly paying down my highest interest rate loans. In order, my targets are:
1) Private loans (variable rate, although much lower than federal loans right now
2) My wife's loans (she's not eligible for PSLF--might as well get rid of her loans first)
3) My higher interest federal loans.

If I'm lucky, the job I want will be at a non-profit/federal institution, and PSLF will still be around. That would mean that I will pay off my private loans and my wife's loans in their entirety (assuming she stops working to raise our children, which is something we're still debating). I will have likely paid off some of my federal loans. But then I will hopefully be able to benefit from PSLF if it does stick around. If it doesn't, I'm still planning on making more-than-the-minimum monthly payment, even once we get down to just my loans, because letting my loans snowball is about the scariest thing I can imagine.

Note that since I'll be in IBR essentially for the rest of my life (until I pay enough of our loans down to not qualify anymore) then none of my interest will ever capitalize (other than what already capitalized at the end of my grace period--there's no way to get around that unfortunately...). Once I have an attending salary and am making payments large enough, the government will first apply my payments towards just the interest (even though the interest is in limbo, interest is what always gets paid off first). Then eventually I'll start whittling at the principle (plus the interest that accrues each month)

I wouldn't get too caught up in the 10% thing with PAYE and loan capitalization--if you are going straight into PAYE and will be in it for the rest of your repayment it has absolutely no benefit for you. If you do that, the only time your loans will capitalize is at the start of repayment/end of your grace period. Unless you were in school an awfully long time or had very high interest rates, that 10% rule won't benefit you with that first interest capitalization event. But then your loans would never capitalize again--so I don't think it's something to concern yourself with.

Like sazerac has been saying--you are responsible for paying off your principle and any accrued interest. Some of that interest may be added to the principle (capitalization), but you will have to pay off everything. If it all gets forgiven, you will be taxed on the entire amount you owe Uncle Sam.

Once again--please consider making payments on top of the IBR/PAYE payments, if they don't cover your interest. You can selectively apply additional payments to your highest interest loans. If you are a resident and only have 50k in income, then true you won't be able to cover much more (but most residents can still handle paying extra unless maybe they're in NYC). If you as a PA are making ~100,000, then you will probably take home about 70k after taxes, maybe a little less or more depending on how good you are at taxes. I'd recommend living on 30k (that's quite a bit of post-tax dollars) and putting 40k towards your loans for at least 2-3 years. Live minimally. After three years you'll have paid off quite a bit of your loans. Then maybe start tapering down at that point--remember, paying more up-front is better than paying more later because of interest. True, under PAYE interest doesn't capitalize, but if you front load repayment then you can pay off whatever interest has accumulated and start paying down the principle, and paying down that principle has a 6-8% return on your investment, which is quite good. I think with a $100,000 salary, you should be able to pay off $200,000 without too much undue hardship, especially if you have/will have a spouse (just my personal opinion).

My personal plan is to do exactly that. If I make 200k, uncle sam and my state will take at least 70k, leaving me with ~120k. I'll then apply 60-80k towards my loans, and basically just live at the same level I am at right now for a few additional years. That'll give me peace of mind and the ability to start saving for my children's college, my retirement, etc. If in 2017, when I finish residency, it looks like PSLF is going to stick around and I'm still eligible, then I'll make just the minimum payments on my federal loans (and put that extra 60-80k towards my private and spouse's loans). But like I said before, it's a big gamble to be counting on forgiveness (and I don't want to pay those ridiculous taxes), so if PSLF disappears or if I get a job that doesn't qualify, I'm going to pay off my loans as fast as I can. I borrowed the money expecting to pay it all back, and sure, if I know I can benefit from forgiveness without a doubt I'll take advantage of it, but otherwise I'm paying back every dime as quick as possible. It's much easier to be poor when you're single/married without kids (or just starting to raise the family).

 

[r3pnit]

so if someone had 100k loan. and for the 20 years they paid just the interest on their loan, they would be taxed for 100k at the end of forgiveness. I can see many people doing this if it benefits their situation


edit:

another thing that doesn't make since if someone wanted to do a loan payoff. It wouldn't show the uncapitalized interest that is just growing in limbo. So wouldn't some people just want to save up and do a large sum pay off because in the end they would get charged principle balance and uncapitalized interest....... If you ask me there are a lot of loop holes

 

[RangerBob]

With $100,000 in principle, you accrue interest at about $6800/yr (if all your loans are stafford loans). Over 20 years, making interest-only payments costs you $136,000. Assuming you're eligible for PAYE (which many of us aren't and only qualify for IBR), at the end of those 20 (25 for IBR) years you can apply for forgiveness on the remaining $100,000. Taxes on that might be around 30-40%, depending on your salary. So you're probably looking at about $166,000 or more in total repayment. If, on the other hand, you pay that $100,000 over 2-3 years with a salary of $100,000, then you will pay closer to $114,000-120,000, and now you're loans are gone. This is why if you have the means, you should pay your loans off faster. True, there might be some people that need more money up front (perhaps if you have a big family to support), but you have to ask yourself if it's worth spending that extra ~$50,000 to have that luxury. It might be--that's an individual preference.

I don't understand your comment on "it wouldn't show the uncapitalized interest that is just growing in limbo." If you log into your servicer's website, you can clearly check how much interest your loan has. It won't show up on the principle, but it's right there with each "loan details" section. You also will usually get quarterly interest statements--so that interest does show up somewhere. Your servicer keeps track of it.

The main reason for people to not wait to do a large sum pay off is because it costs you more money. If you make a large-sum payoff on your $100,000 after waiting say 10 years, then you're paying off that $100,000 plus whatever interest has accrued on that $100,000 (if you weren't covering it with your monthly payments). If instead you make monthly payments that cover more than the interest accrued each month, then you're whittling down on the principle, which means that your loans will accrue less interest over time. That's what happens with loans--at first it seems like most of your monthly payment is just going towards paying off interest, but over time as you whittle down the principle you notice that most of your payment starts going towards the principle, because less interest is accruing.

 

[r3pnit]

If you lower your interest enough with the PAYE plan and your 10 year payments becoe more then your IBR, I understand you lose the PAYE and have to start playing IBR? Do you loose your foregiveness for the 20 years now?


Lets say after 15 years I finally pay off enough that my IBR becomes more than my 10 years. Do the next 5 years no longer count and I don't get foregivness after 5 years?
I read this:
If your income increases to the point where you no longer have a partial financial hardship, any unpaid interest that has accumulated would be capitalized (added to your total loan balance). You can still stay in IBR, and your payments will be capped at the 10-year standard monthly payment on the balance you owed when you first entered repayment on the loan. You will never be "kicked out" of IBR based on your income. Here's a calculator to find out what that 10-year standard payment would be.

but do you lose foregiveness

Again thanks everyone for answering all the questions. I think this thread will be helpful for many

 

[sazerac]

If you lower your interest enough with the PAYE plan and your 10 year payments becoe more then your IBR, I understand you lose the PAYE and have to start playing IBR? Do you loose your foregiveness for the 20 years now?


Lets say after 15 years I finally pay off enough that my IBR becomes more than my 10 years. Do the next 5 years no longer count and I don't get foregivness after 5 years?
I read this:
If your income increases to the point where you no longer have a partial financial hardship, any unpaid interest that has accumulated would be capitalized (added to your total loan balance). You can still stay in IBR, and your payments will be capped at the 10-year standard monthly payment on the balance you owed when you first entered repayment on the loan. You will never be "kicked out" of IBR based on your income. Here's a calculator to find out what that 10-year standard payment would be.

but do you lose foregiveness

Again thanks everyone for answering all the questions. I think this thread will be helpful for many

Your questions don't make any sense because with the payment plans (IBR and PAYE) your monthly payments are based on your INCOME not on how much interest you might be generating month-to-month.

Let's say you have a huge jump in INCOME such that now your PAYE (or IBR) payments would be larger than what your original 10-year loan payments would have been. Well the federal government isn't going to be a meanie and now force you to pay more per month that the original terms of your loan. So you would automatically switch from the "more expensive" income-based PAYE (or IBR) plan into the cheaper original 10-year plan.

Ironically if you read the fine print, the two numbers the government compares are (1) your income-based PAYE (or IBR) payment now versus (2) what your 10-year payment would have been back when you would have started making repayments. It is entirely possible that your loan balance will have grown while you were waiting for your income to rise. So when you switch to the original 10-year plan sized payments, there is no guarantee that your loans will be paid off in 10 years. Hell there is no guarantee that your original 10-year plan sized loan payments will even cover the interest on your now gigantic loan that's been growing for years.

Finally, you asked about how this affects forgiveness. It doesn't. After making the minimum of (PAYE or 10-year plan) payments for 20 years, your loan is forgiven and you are sent a tax bill. If you don't qualify for PAYE for some reason, then it's after making the minimum of (IBR or 10-year plan) payments for 25 years, your loan is forgiven. The logic here is that after a suitable amount of time, the government is sick of your damn loan and just wants to get it off their books.

Hope this helps!

 

[sazerac]

With $100,000 in principle, you accrue interest at about $6800/yr (if all your loans are stafford loans). Over 20 years, making interest-only payments costs you $136,000. Assuming you're eligible for PAYE (which many of us aren't and only qualify for IBR), at the end of those 20 (25 for IBR) years you can apply for forgiveness on the remaining $100,000. Taxes on that might be around 30-40%, depending on your salary. So you're probably looking at about $166,000 or more in total repayment. If, on the other hand, you pay that $100,000 over 2-3 years with a salary of $100,000, then you will pay closer to $114,000-120,000, and now you're loans are gone. This is why if you have the means, you should pay your loans off faster. True, there might be some people that need more money up front (perhaps if you have a big family to support), but you have to ask yourself if it's worth spending that extra ~$50,000 to have that luxury. It might be--that's an individual preference.

I don't understand your comment on "it wouldn't show the uncapitalized interest that is just growing in limbo." If you log into your servicer's website, you can clearly check how much interest your loan has. It won't show up on the principle, but it's right there with each "loan details" section. You also will usually get quarterly interest statements--so that interest does show up somewhere. Your servicer keeps track of it.

The main reason for people to not wait to do a large sum pay off is because it costs you more money. If you make a large-sum payoff on your $100,000 after waiting say 10 years, then you're paying off that $100,000 plus whatever interest has accrued on that $100,000 (if you weren't covering it with your monthly payments). If instead you make monthly payments that cover more than the interest accrued each month, then you're whittling down on the principle, which means that your loans will accrue less interest over time. That's what happens with loans--at first it seems like most of your monthly payment is just going towards paying off interest, but over time as you whittle down the principle you notice that most of your payment starts going towards the principle, because less interest is accruing.

I hate to be a pedant, but another factor you missed is the time value of money. Ordinarily the inflation rate can be ignored, but we are talking about paying off a loan in 3 years versus 20 years. Even assuming a modest 3% inflation rate, the $100,000 of phantom income twenty years hence will only "feel" like approximately $57,000 in today's dollars.

Humans are notoriously short-sighted when it comes to pay-now versus pay-later type scenarios (almost always opting to pay later!), but over a twenty year time span it might actually be the smarter option since much of the financial pain is delayed until dollars themselves are worth so much less.

It would be interesting to compute the pay-in-3 versus the pay-in-20-plus-forgiveness scenarios in 2014 dollars and see which one comes out ahead.

 

[Postictal Raiden]

I agree with sazerac. Although there maybe advantages to paying off the debt as soon as possible (such as the advantage of having a peace of mind), in that specific example given by RangerBob, repaying the debt over 20 years is more beneficial imo. It may appear that paying off the debt in 3 years vs 20 saves the borrower ~50K, but this is not entirely true because of inflation.

Assuming an inflation rate of 2%, we can view the annual repayment amount, $8300, for the next 20 years in today's dollar value as follows:

$8300 in 2014, $8134 in 2015, $7971 in 2016, ..., $5541 in 2033. If we add up all the adjusted annual repayment amounts we get ~138000. The actual difference between repaying the debt in 3 years vs 20 years is approximately 20K.

 

[RangerBob]

That's true sazerac and Ibn Alnafis MD (and thanks for the calculations), and definitely something to consider. That wasn't something I'd thought about. However, there's quite a bit of debate on whether physicians salaries will even keep pace with inflation (I personally think they will, though perhaps the high-paying specialties will see more cuts, but I seem to run into lots of naysayers).

There are tons of factors to consider--paying money now means a guaranteed ~7-8% return on your investment. But, if you're a good investor, you might be able to narrow that gap that Ibn Alnafis mentions. Also, if inflation starts shooting up (and salaries with it) then you could easily even come out ahead by extending repayment as long as possible. It happened in the 70's, right? (Or was it the 80's?) Of course, the key here is to make sure all your variable-interest loans are paid off!!!

I'm someone who personally just doesn't want the specter of student debt hanging over me, so my personal plan is to pay things off as soon as possible. Life circumstances may definitely change that as I go on in life. But the advice I was always given by our financial aid officer (who has spoken with the higher ups Dept of Education regarding forgiveness) was that unless you sign a contract, loan forgiveness can be taken away at the drop of a hat. I'd hate to see someone really be planning and counting on forgiveness and see it drop away.

It's very possible that I'll have my loans for the full 20 or 25 years (technically I qualify for IBR, but once I consolidate my FFELP loans I believe I can do PAYE...) The two things I know I'll definitely be doing are: 1) Paying off private loans ASAP (should be done by the end of residency) and 2) front-loading at least some repayment.

Once I have an attending salary, I'll probably sit down with a financial planner and possibly a tax lawyer and really sort out what my best options are going to be.

 

[r3pnit]

Your questions don't make any sense because with the payment plans (IBR and PAYE) your monthly payments are based on your INCOME not on how much interest you might be generating month-to-month.

Let's say you have a huge jump in INCOME such that now your PAYE (or IBR) payments would be larger than what your original 10-year loan payments would have been. Well the federal government isn't going to be a meanie and now force you to pay more per month that the original terms of your loan. So you would automatically switch from the "more expensive" income-based PAYE (or IBR) plan into the cheaper original 10-year plan.

Ironically if you read the fine print, the two numbers the government compares are (1) your income-based PAYE (or IBR) payment now versus (2) what your 10-year payment would have been back when you would have started making repayments. It is entirely possible that your loan balance will have grown while you were waiting for your income to rise. So when you switch to the original 10-year plan sized payments, there is no guarantee that your loans will be paid off in 10 years. Hell there is no guarantee that your original 10-year plan sized loan payments will even cover the interest on your now gigantic loan that's been growing for years.

Finally, you asked about how this affects forgiveness. It doesn't. After making the minimum of (PAYE or 10-year plan) payments for 20 years, your loan is forgiven and you are sent a tax bill. If you don't qualify for PAYE for some reason, then it's after making the minimum of (IBR or 10-year plan) payments for 25 years, your loan is forgiven. The logic here is that after a suitable amount of time, the government is sick of your damn loan and just wants to get it off their books.

Hope this helps!

ok I guess what Im confused on. I understand IBR/PAYE is based on your income . But what is the 10 year plan based on? Is the 10 year plan based on your original balance 10 year plan or does it change every year? If the 10 year plan is based on your original balance, then your 10 year balance will stay the same for your IBR /PAYE payments for that 20-25 years if that is the case?

My other questions, like you said what if your PAYE payments end up being higher then your 10 year plan payments. Are you still eligible for forgiveness after 10-20 years?


edit: does anyone know when PAYE starts, is it not until July 1, 2014 from i been reading? Do your IBR payments before that count towards your PAYE payments?

 

[Postictal Raiden]

ok I guess what Im confused on. I understand IBR/PAYE is based on your income . But what is the 10 year plan based on? Is the 10 year plan based on your original balance 10 year plan or does it change every year? If the 10 year plan is based on your original balance, then your 10 year balance will stay the same for your IBR /PAYE payments for that 20-25 years if that is the case?

My other questions, like you said what if your PAYE payments end up being higher then your 10 year plan payments. Are you still eligible for forgiveness after 10-20 years?


edit: does anyone know when PAYE starts, is it not until July 1, 2014 from i been reading? Do your IBR payments before that count towards your PAYE payments?

The 10-year standard repayment plan has nothing to do with how much you make. The monthly payments don't change throughout the repayment period. In your situation, with a debt of 200K, your monthly payment amount under this plan is $2300 (or $27600 a year). Therefore, to qualify for IBR/PAYE, your AGI income shouldn't exceed 10 times your annual repayment amount under the standard 10-year plan, so in this case your income shouldn't exceed $276K/year. Given, that the average PA salary is 100K/year and assuming a 3% raise per year, it is highly unlikely that your income will ever make ineligible for PAYE/IBR, unless, of course, you do plenty of overtime.

Use this site to have a good idea about your loan repayment options and how much you'll be paying http://www.finaid.org/calculators/

 

[sazerac]

ok I guess what Im confused on. I understand IBR/PAYE is based on your income . But what is the 10 year plan based on? Is the 10 year plan based on your original balance 10 year plan or does it change every year? If the 10 year plan is based on your original balance, then your 10 year balance will stay the same for your IBR /PAYE payments for that 20-25 years if that is the case?

My other questions, like you said what if your PAYE payments end up being higher then your 10 year plan payments. Are you still eligible for forgiveness after 10-20 years?


edit: does anyone know when PAYE starts, is it not until July 1, 2014 from i been reading? Do your IBR payments before that count towards your PAYE payments?

Your 10 year plan payments are based on what it would take to pay off your original loan in 10 years. It does not change every year. It is a snapshot of what it would have taken to pay off your loan in 10 years, if you had started making constant monthly payments from the moment you left school and started your career.

The balance on your loan will likely change every year. You will always need to pay off (or get forgiven) your current loan balance. The loan balance of your original loan is only relevant in the sense that it was used once to calculate what your 10-year monthly loan payment would be.

If your PAYE payments would be larger than your original 10-year plan sized payments, then you pay the smaller original 10-year plan sized payments. You will still be eligible for forgiveness if your loan still exists in 20 years.

For example:
Lets say in the year 2020 you begin repayments.
In order to pay off your loan in 10 years, you would have to make payments of $1000 a month.
You have a small income, so through PAYE you instead only pay $500 a month.
You aren't even covering the interest on your loan, so your loan balance grows and grows.
Then you get a big pay raise 18 years later in the year 2038.
Through PAYE your loan payments would now be $1200 a month.
So you switch over to your original $1000 a month plan.
But your loan balance is now huge.
$1000 a month is not going to pay off your loan in 10 years anymore because your loan is so much larger now.
$1000 a month might not even cover the interest on your loan anymore because your loan is so much larger now.
Doesn't matter, you start paying $1000 a month.
Your loan grows and grows some more.
Finally in the year 2040 you have been making loan payments for 20 years.
PAYE forgives the entire current large balance of the loan, and hits you with a tax bill for the phantom income.
The end.

 

[r3pnit]

Another question about the goverment paying first 3 years of interest on subsidized loans.
When your loan is foregiven, is this amount added to the total ? It sound like you don't have to add this on to your total foregiven loan.



Also this is something I grabbed from another forum that I thought was worth reading:

With respect to the taxation concern, some things to consider:

. No one is elgible for the 20-25 year forgiveness yet, and won't be for a long time. By the time that comes around, our generation will be in power and there's a good chance something will be done about it.
2. Even if you do face a tax bill, it is only to the extent you were solvent. The equation is [forgiven loan] - [net worth without loan] = extent of insolvency. IRS Form 982. So 400k of forgiveness for someone with a without-loan net worth of 300k was insolvent to the extent of 100k, meaning he would be taxed on 300k not 400k. Solvency could largely be avoided, for example, by refinancing one's home which is likely to be one's most significant asset. Encumbering assets right before forgiveness is likely to become commonplace if this remains taxable.
3. Assuming IBR accomplishes its goal and you live a normal life and have substantial retirement savings and home equity at the point of hitting IBR forgiveness, and nothing is done about it, you may face a tax bill that is quite large. But for this, there are two subpoints:
A. Remember that accrued interest while on IBR is not capitalized as long as you have a partial financial hardship, which for people with 250k in debt will be for the entire life of the loan. I ran the numbers, for example, for someone with 75k in income and 200k in debt. Such a person would actually only see about 40k in unpaid interest due to the lack of capitalization.
B: Don't forget net present value. A dollar today is worth more than a dollar tomorrow, due to inflation. When your payments are adjusted for NPV, the money you save by having lower payments up front is large. In the same hypothetical above, the 75k income/200k debt earner will have paid 344k in actual dollars by the end of repayment, but adjusted for NPV those payments are equivalent to about 160k, because he made them over 25 years.
Bottom line: When you consider NPV, the insolvency exclusion, and the fact that interest is uncapitalized, the taxation issue alone does not make IBR a bad deal. You still save money overall, at least in terms of real purchasing power. If, OTOH, things don't work out and you don't have a substantial income over all those years, that same insolvency exclusion may eliminate the tax bill completely.
Calculators that show you the importance of things like NPV and uncapitalized interest are available at finaid.org.

 

[r3pnit]

*** more importantly this part:

IBR/ICR are 25-year plans. They index payments to a maximum of a percentage of your "discretionary income." 20% for ICR. 10% for IBR if you are poor enough to qualify.
What is not paid off after 25-years is "forgiven" and treated as taxable income. How much tax you will have to pay is mitigated (currently) by how much in "assets" you have. There is an IRS form for this. So you might owe the applicable tax rate on the entire amount forgiven or pretty much nothing.