Starting July 1, millions of student loan borrowers will be required to select new repayment plans. The decision you make could significantly impact your monthly payments.
Approximately 7 million individuals who participated in the now-ended SAVE program created during the Biden administration will have to re-enroll in alternative plans, as payments resume after nearly two years of suspension.
President Trump’s One Big Beautiful Bill Act limited the repayment options to just two: the existing Income-Based Repayment Plan (IBR) and a new repayment assistance plan known as RAP.
The advantage? “There are only two choices,” notes Erika Sandberg, a consumer finance expert. While this simplicity can be reassuring, she also hears concerns from borrowers about their ability to meet these payments.
An analysis from the advocacy group Protect Borrowers highlighted growing anxiety among renters, indicating that the plan changes may increase their monthly bills by roughly $350.
As of July 1, federal loan servicers will inform SAVE program participants about deadlines for necessary actions. If borrowers don’t select a new plan, they will automatically be shifted to an adjusted standard IBR plan.
Under IBR plans, borrowers pay 10% of their discretionary income toward their balance over a period of 10 to 25 years, depending on the loan size. Those with loans prior to July 1, 2014, will be required to pay 15% of their discretionary income for 25 years.
Before the Republican bill, the standard repayment plan had a fixed 10-year term, regardless of the loan amount.
Alternatively, borrowers can opt for the new RAP plan, which features tiered payments ranging from 1% to 10% of adjusted gross income. Essentially, the higher your salary, the more you pay.
But keep in mind, the repayment period for RAP could extend up to 30 years.
“That loan is going to last for decades and accumulate a lot of interest,” Sandberg emphasizes.
One major concern is the long-term debt; it can linger when it comes to future financial goals, like buying a home or helping with a child’s wedding.
RAP doesn’t adjust for inflation and mandates a minimal payment of $10 a month for very low-income earners, which the standard plan does not demand.
Additionally, it only reduces payments by $50 for each dependent claimed on tax returns, while the standard plan allows for a broader adjustment.
It’s crucial for borrowers to evaluate the RAP tier structure, as it can lead to significant variations in monthly payments for individuals with similar incomes.
For example, a borrower earning $40,000 would pay around $100 a month, but someone with an income of $40,001 could see their payments jump to about $133.
“Be sure to assess your income and debts to understand what your monthly payments will be; the differences can be substantial,” Sandberg advises.
Since there’s no payment cap with RAP, many borrowers switching from the SAVE program may end up paying a higher percentage than they did previously.
Those who previously enrolled in SAVE may want to consider choosing a Pay as You Earn (PAY) or another income-driven repayment plan for the next two years until it closes in July 2028.
Low-income borrowers might find IBR more beneficial as their payments would amount to $0, while those with moderate incomes in better positions to pay off loans within 20 years may find RAP more suitable.
Switching to IBR after committing to RAP won’t count as a qualified payment, making RAP more of a long-term commitment.
SAVE borrowers can switch to IBR now, but if interested in RAP, they must wait until July 1.
In the meantime, it’s essential for borrowers to maintain their monthly payments, Sandberg stresses. “Regardless of the plan, making payments on time is crucial for keeping your credit in good shape,” she says.
If meeting monthly payment obligations proves challenging, she suggests returning to the lender to negotiate and avoid falling into default.
