But wait, it gets worse. Under current law, any remaining balance that is forgiven after 25 years will be treated as taxable income in the year it is forgiven. Yep, you will get a 1099-C tax form that notifies you that the unpaid balance was reported to the IRS, which in turn is going to expect you to pay income tax on it.
Using the same example once again, the forgiven balance is more than $12,000. Even if your salary that year is low, adding $12,000 to your income could likely push you into a higher tax bracket. We don't know what tax rates will be in 25 years, but even if I am generous and assume you'd somehow still be in a super low 10-percent bracket, that's an extra $1,200 to settle with the IRS, bringing your total loan costs to nearly $45,000. Or about $10,000 more than what you'd owe under the 10-year repayment plan. (For recent borrowers with loans taken out after June 30, 2014, there's a new repayment plan called Pay as You Earn through which, like IBR, if you qualify, your initial payments are low. After 20 years or repayment the remaining balance is forgiven. But the same tax hit applies.)
I hope that opens your eyes to the true cost of opting for a long repayment schedule. I highly encourage you to play around with the government's Student Loan Repayment Estimator. You can get customized estimates based on your actual outstanding loans, and the costs under different repayment plans based on your income, family size and where you live. (Eligibility for income-based plans is based on state-level income cutoffs. For the above example, I assumed a single resident of Illinois with $25,000 in adjusted gross income.)
I totally understand how hard it may be to consider the higher payments that come with a 10-year repayment plan. But I want you to think long and hard about whether you can pull this off. Not only will you save a lot of money in the long run, you will have this debt completely paid off in 10 years. That's a nice load off your finances and your conscience. Or you might consider working in a public service job that makes you eligible for the Public Service Loan Forgiveness Program. After 10 years of on-time payments your loan will be forgiven, and the IRS does not require you to pay tax on the forgiven balance.