The Education Department is mounting a new push to convince millions of federal student loan borrowers to sign up for a new repayment that is set to launch in just two weeks. The effort comes as the department is preparing to make significant changes to federal student loans starting on July 1 that may impact nearly every element of the borrower experience.
“❌ Runaway student loan interest. ❌ Ballooning principal balances. ❌ Years of payments with no progress. The cycle of student loan debt ends with the Repayment Assistance Plan,” said the Education Department in a statement on X on Monday pitching the new repayment option for federal student loans.
“Not only will the new Repayment Assistance Plan (RAP) make repaying your student loans easier, but it can reward borrowers who pay on time with interest waivers and matching principal payments,” echoed the Office of Federal Student Aid, the unit within the department that oversees federal student loans, in a statement on X the same day.
But while the new student loan repayment plan will indeed have some important benefits, it is important that borrowers understand that those features may come with significant tradeoffs, which the Education Department isn’t exactly highlighting in its new marketing efforts. Here’s what student loan borrowers should know.
RAP May Have Higher Student Loan Payments Than Other Plans
RAP is an income-driven repayment plan, and like all IDR options, it calculates a unique monthly payment for borrowers based on their income (typically their Adjusted Gross Income from their federal tax return) and their family size or the number of their dependents. The goal is for student loan payments to be affordable, even for those with large balances.
But the Education Department isn’t exactly highlighting that while RAP may offer reasonably affordable payments, those payments may be much higher than what borrowers are expecting, especially for those who will be getting kicked off the SAVE plan starting in July.
A single borrower with two dependents and an Adjusted Gross Income of $75,000 may have paid only $125 per month under SAVE, or $290 per month under the PAYE plan. But both of these plans are disappearing (SAVE starting in July, and PAYE by 2028). The same borrower would pay $340 per month under RAP. While that’s a bit less expensive than what they would pay under the IBR plan, this still represents a significant jump in monthly payments.
“SAVE was the most affordable repayment plan, and your last payments in SAVE were likely based on your income from two or more years ago,” explained the National Consumer Law Center in a statement last year. “Your new payments will most likely be higher in whatever plan you switch to, both because other plans are more expensive than SAVE and because your payments will likely be based on more recent income, which may have gone up.”
Borrowers “will experience an immediate and unprecedented payment shock as their monthly payments jump” as they are forced out of existing payment plans, echoed Protect Borrowers, a student loan borrower advocacy group, in a letter to lawmakers last year.
RAP Extends The Timeline For Student Loan Forgiveness
RAP, like all income-driven repayment plans, offers eventual student loan forgiveness after a borrower has been in repayment for years. But in its current marketing efforts, the Education Department appears to be downplaying one of the most significant downsides of RAP, which is that it will require many more years in repayment compared to other IDR plans before a borrower can qualify for student loan forgiveness.
The PAYE plan offers student loan forgiveness after 20 years in repayment. The IBR and ICR plans provide for loan forgiveness after 25 years. SAVE offered varying timelines for loan forgiveness, typically between 20 and 25 years depending on the type of student loans a borrower had. But RAP will require 30 years in repayment before a borrower can get their student loans forgiven.
“Under RAP, any remaining loan balance may be discharged after you’ve satisfied 360 qualifying monthly payments over a period of at least 30 years,” said the Education Department in online guidance updated earlier this month.
The longer repayment term could cause some borrowers to pay more in total on their student loans, even if they have marginally lower payments under RAP compared to the other IDR plans. This is particularly true if borrowers have higher incomes during the last five years in repayment, which for many individuals would be during their peak earning years.
In addition, the department has now confirmed that payments made under RAP will only count toward RAP’s 30-year repayment term. They won’t count toward student loan forgiveness under other IDR options if a borrower subsequently decides to switch plans.
“If you’re eligible for the IBR, ICR or PAYE plans and you enroll in RAP, you’re permitted to reenroll in the IBR, ICR or PAYE plan,” said the department in its online guidance. “However, payments made under RAP won’t count toward discharge under the IBR, ICR or PAYE plans.”
Student Loan Interest Benefit For RAP Comes With Strict Rules
The Education Department is focusing largely on the interest and principal benefits of RAP in its new push to get borrowers to sign up in July. To be clear, these benefits are real, and they could be very beneficial.
“Borrowers whose full, on-time monthly payments are less than the interest accrued between the previous due date and the current payment date will have their unpaid interest for that month subsidized,” explains the department in its online guidance.
That means that borrowers won’t see their student loan balance increase if their payments aren’t high enough to cover the accruing interest each month. “Your total outstanding balance will never go higher than your total outstanding balance when you entered RAP,” said the department.
But there are some important caveats to this benefit. The interest subsidy will only apply if a borrower makes their RAP payment in full and on time. Late payments, partial payments, and missed payments will effectively forfeit the interest benefit. The RAP rules also appear to disincentivize making payments that are higher than your minimum required monthly payments.
“If a borrower’s monthly payment amount isn’t enough to cover the interest that accrued since the previous due date and the borrower (or someone on the borrower’s behalf) chooses to pay more than the monthly payment amount, then any amount paid above the monthly payment amount will be applied first to accrued interest and then to the principal,” said the department. “This means that the additional amount paid may reduce or eliminate any interest subsidy that the borrower would’ve been entitled to if they hadn’t paid more than the amount due.”
Student Loan Principal Benefit For RAP Also Comes With Caveats
The principal benefit of RAP involves the Education Department applying up to $50 directly to their principal balance, rather than to interest. Under normal federal student loan repayment rules, any payments must be first applied to outstanding and accruing interest before it can be applied to principal.
“We make a matching principal payment to ensure that the borrower’s principal is always reduced by at least the total amount paid (but not to exceed $50),” said the Education Department in its online guidance.
But this principal matching benefit comes with some fairly significant restrictions and caveats. The benefit is only available “when a borrower makes a full, on-time payment and the principal isn’t reduced by at least $50,” explains the department. As with the interest benefit, that means late, partial, or missed payments would forfeit the benefit.
In addition, “If a borrower makes a payment (or a payment is made on the borrower’s behalf) in a month in which the borrower hasn’t been billed due to being enrolled in RAP and/or because the borrower’s loan isn’t in a repayment status, then that month won’t be eligible for a matching principal payment,” says the department. This would include any deferment and forbearance periods, for example. And just like with the RAP interest benefit, making extra payments on your student loans, or paying more than your minimum required monthly payment, could result in a reduction or loss of the principal benefit.
Ultimately, federal student loan borrowers should understand that while RAP will provide several important benefits, the new repayment plan will also have some downsides. And the Education Department’s current marketing tactics are primarily focusing on the program’s best features. While these features are very real and important, borrowers should do their own independent review to pick the best repayment plan option for their student loans, and determine whether the tradeoffs for RAP will be worth it in the long run.
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