The Education Department is about to launch a brand-new income-driven repayment plan for federal student loans, and is encouraging borrowers to sign up. The new Repayment Assistance Plan, or RAP, is expected to launch by July 1, in conjunction with the wind-down of the SAVE plan, a Biden era program that Republican lawmakers and the Trump administration have sought (successfully) to eliminate.
“The Working Families Tax Cuts Act simplifies and streamlines the current confusing patchwork of repayment plan options for future borrowers to two flexible options: a new Tiered Standard repayment plan for fixed monthly payments over a 10 to 25-year term, and a new income-driven plan called the Repayment Assistance Plan that allows borrowers the opportunity to actually pay down their student loan debt by preventing negative amortization over the life of the loan,” said the Education Department in a summary last month accompanying updated regulations that will govern the new plan.
Under the new legislative and policy changes, the Education Department will launch RAP this summer. At around that same time, the department will send notices to SAVE plan borrowers that they will have 90 days to move their student loans to a different repayment plan. The IBR, PAYE, and ICR plan will continue to be options for current borrowers, but PAYE and ICR will also be phased out by July 2028, eventually leaving only IBR and RAP. Anyone who takes out new federal student loans or consolidates their existing loans on or after July 1 of this summer would only be able to enroll in RAP or a new tiered Standard plan (meaning they would lose access to IBR, PAYE, and ICR).
So, should you enroll your federal student loans in RAP when it launches this summer? As is often the case, it depends. The program will provide some benefits, but also will feature some pretty significant drawbacks. Student loan borrowers will have to decide whether they are comfortable with the tradeoffs. Here’s a breakdown.
Benefits Of Moving Student Loans To The Repayment Assistance Plan
The main benefits of RAP are interest subsidies and a principal payment benefit.
Because income-driven repayment plans allow borrowers to make payments on their federal student loans based on a formula applied to their income, it’s possible (and common) for borrowers to pay less than the amount of interest that accrues each month. If that happens, a borrower’s student loan balance can balloon over time through a process called negative amortization. Income-driven plans result in eventual student loan forgiveness, but because that loan forgiveness can be treated as a taxable event, a larger balance could mean a higher tax bill at discharge (or a larger balance to pay off, if the borrower’s financial circumstances change before then).
RAP will have a major benefit that waives any interest that accrues in excess of a borrower’s minimum require monthly student loan payment (as long as they make their payment on time), preventing runaway balance growth. This is similar to what the SAVE plan had offered, before it was suspended and ultimately eliminated. In addition, for borrowers in this situation (whose payments are not covering all their interest), RAP will allow up to $50 of each payment made on their student loans to go directly to principal, a unique feature that no other income-driven repayment plan offers. The net effect of these benefits is that not only will a borrower’s federal student loan balance not grow any further under RAP, but it should actually decrease for all borrowers over time (even if only marginally).
As for monthly payments, the benefits of RAP are a bit more muddled. RAP will almost universally have lower monthly payments than the ICR plan, and will often (but not always) have lower monthly payments than the older version of the IBR plan for borrowers who first took out their federal student loans before July 1, 2014. However, payments under RAP will typically be higher compared to SAVE, PAYE, and the newer version of IBR. Importantly, Parent PLUS loans will not be able to enroll in RAP under any circumstances, even if those loans are consolidated.
Drawbacks Of Moving Student Loans To Repayment Assistance Plan
But while the interest subsidy and directed principal payment are major benefits of RAP, there are also some serious downsides.
In addition to being more expensive than SAVE, PAYE, and new IBR (which will cause all of those borrowers to experience higher monthly payments on their federal student loans when they are forced to change plans), RAP will have no cap or upper limits on high the payments can get. IBR and PAYE, on the other hand, cap monthly student loan payments at the amount equivalent to the 10-year Standard plan. That’s a critical downside of RAP, because that means that at some point, payments under RAP could become much more expensive than IBR and other federal student loan repayment plan options as a borrower’s income increases over time.
RAP will have other payment quirks that are arguably downsides. Unlike all other income-driven repayment plans, RAP will have a minimum required monthly payment of at least $10 per month. That may not sound like much, but even borrowers who can demonstrate that they have no income whatsoever will still have to pay at least $10 per month. Under existing income-driven repayment plans, including IBR, borrowers earning under 100% or 150% of the federal poverty limit based on their family size can have a $0 payment for up to 12 months. In addition, RAP has a less generous definition of family size than existing income-driven plans, offering only a flat $50 monthly payment deduction per dependent child; that limitation will hit multigenerational and nontraditional families hard, as a borrower’s monthly payment may not be adjusted to reflect the additional expenses associated with supporting a larger family. And RAP’s unique tiered repayment formula, whereby the percentage of a borrower’s income that must be dedicated to their federal student loans increases at regular income levels, means that borrowers may experience unexpected jumps in their monthly payments after seeing relatively small increases in their income.
Perhaps the most significant downsides for RAP, however, involve student loan forgiveness. All income-driven repayment plans, including RAP, allow borrowers to discharge their federal student loans after many years in repayment. And RAP, along with the other IDR options, are qualifying repayment plans for Public Service Loan Forgiveness, or PSLF. But RAP will require 30 years in repayment before a non-PSLF borrower’s federal student loans can be forgiven. That is far longer than the 20- and 25-year terms available under ICR, IBR, and PAYE, and the additional years in repayment could easily offset the slightly lower monthly payments that some borrowers may have under the program.
And while historically, payments made under one income-driven plan would count toward student loan forgiveness under other income-driven plans, that won’t be the case for RAP. Payments made under other plans can count toward student loan forgiveness under RAP, but payments made under RAP will not count toward student loan forgiveness under ICR, IBR, or PAYE. That means that borrowers who switch to RAP and later change their mind (i.e., because they want to cap their monthly payments under IBR, or they want to access the shorter student loan forgiveness timelines available under the other plans) will not be able to transfer the student loan forgiveness credit they earned while in RAP.
What Borrowers Should Know Before Switching Student Loans To RAP
RAP is not available yet, so it is not possible at this time to switch your student loans to the new program. The Education Department is expected to launch RAP on or around July 1. But some student loan borrower advocacy groups are warning that the launch may be rocky, as the department implemented significant staffing reductions last year and has been contending with substantial backlogs across multiple repayment and student loan forgiveness programs for more than a year.
“ED is not well prepared to smoothly transition borrowers into other plans,” warned The Institute For College Access and Success in a blog post updated in March.
Perhaps reflecting this reality, recent reporting from Politico indicates that the department is rushing to hire new staff for the Office of Federal Student Aid, which operates the sprawling federal student loan system. It is unclear if the department will have sufficiently trained staff in time for the rollout of RAP.
Ultimately, federal student loan borrowers currently in repayment or in the SAVE plan forbearance should proceed with caution. It will be prudent to weigh the pros and cons of the new Repayment Assistance Plan, and determine whether its potential benefits will outweigh the drawbacks. And even if you decide that switching your student loans to RAP would be a good idea, it may be better to first evaluate how the rollout goes this summer, before making a final decision.
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