Question:
How would taxes on the following be essed: FEDERAL STUDENT LOAN: Monthly payments are based upon 20% of AGI for 25 years.If the monthly payment does not cover interest the interest accrues until it reaches 10% of the initial principal and is then capitalized and added to principal.After that point all interest accrues separately and is not added to principal.At the end of the 25 years the "unpaid portion of the loan is forgiven, but with income taxes paid on the amount forgiven" My question is would the tax be paid on the initial principal only , the principal and capitalized interest, or the principal, capitalized interest plus the accrued interest ?

I.E.-- I borrow 100,000 and my income is low and I pay 300/mo. for 25yrs which does not even keep up with Interest. After the accrued interest reached 10% of the initial loan (10% of 100,000 = 10,000) the amount is capitalized and added to the principal(now 110,000) from that point on for the life of the loan the interest accrues without ever being capitalized again. After 25 years the loan is forgiven but income tax is owed on the amount forgiven 100,000 is Principal 100,000 + 10,000 ( cap interest)= 110,00 Approx. 250,000 interest sitting never capitalized, On which amount would taxes would be owed : 100,000 Or 110,000 Or 350,000

Answer:
On which amount would taxes would be owed : 100,000 Or 110,000 Or 350,000 Your taxable income is the amount forgiven. This would include principal and interest.