I was taught by my Rabbi that the Eastern border for Ha Eretz, according to Bereshit 15:18 & Yehoshua 1:4, actually extended all the way to Babylon. I have trouble believing that this should be the interpretation. What do you think it should be and why?

This is in fact the natural border of Israel, metioned in Bamidbar and Devarim as well. That was the border which became possible in the days of Shlomo Hamelech when the Israeli kingdom had it's maximum area. Rabbi Ro'i Margalit