Student loan borrowers will have new repayment options available in July: How to choose

Changes included in the One Big Beautiful Bill Act will give millions of federal student loan holders access to two new repayment options starting July 1. As a result of this law, some student loan repayment plans will also be eliminated.

The Repayment Assistance Plan (RAP) is the U.S. Department of Education’s newest income-driven repayment plan (IDR), which means that a borrower’s monthly bill is set as a percentage of their income.

Another new option is the tiered standard plan. This involves fixed payments spread over several different schedules based on the borrower’s total debt.

“Borrowers are facing a great deal of confusion and anxiety in the face of change,” said Jaylon Harbin, federal campaigns director for the Center for Responsible Lending, a consumer advocacy group.

“We encourage borrowers to carefully consider all repayment options available to them before enrolling in a new plan,” Harbin said.

Here’s what you need to know about two new repayment options coming in July and how to decide which plan is right for you.

Although RAP is an IDR plan, it has several features that make it different from the Department of Education’s other IDR options.

Congress created the first IDR plans in the 1990s to make bills more affordable for student loan borrowers. Historically, this plan limits people’s monthly payments to a portion of their discretionary income and erases the remaining debt after a set period of time (usually 20 or 25 years).

With RAP, monthly payments typically range from 1% to 10% of revenue. The more you earn, the more payments you will need to make. The minimum monthly payment is $10 for all borrowers. Current IDR plans offer $0 monthly payments to certain very low-income borrowers.

RAP also does not protect a portion of the borrower’s income in calculating the bill, like other IDR plans. Rather, it determines your bill based on what’s called adjusted gross income. AGI is your gross income before taxes minus certain deductions.

With RAP, student loans are forgiven after 30 years, compared to the typical 20- or 25-year schedules of other IDR plans.

However, RAP comes with some perks. For example, federal student loan borrowers receive $50 off their monthly bill for each eligible dependent. Those who are paying their bills but are not making progress in repaying their principals may also be eligible for a small grant from the Department of Education.

“In some cases, the federal government may even put in a few dollars to reduce the principal if the requested payments aren’t sufficient to reduce the principal,” said Betsy Mayotte, president of the Association of Student Loan Advisors, a nonprofit organization that helps borrowers repay their loans.

Additionally, payments made under the RAP allow borrowers to rely on a 10-year timeline for debt forgiveness under the Public Service Loan Forgiveness Program. PSLF allows nonprofit organizations and government employees to have their student loans forgiven after 10 years.

Borrowers with existing federal student loans will maintain access to some current IDR plans, including income-based repayment plans (IBR). Under the terms of IBR, if a borrower takes out a loan on or after July 1, 2014, the borrower will pay 10% of their discretionary income each month. For borrowers who took out loans before that date, that percentage rises to 15%. New borrowers are eligible for debt forgiveness after 20 years, and older borrowers are eligible for debt forgiveness after 25 years.

Current borrowers have access to income-contingent repayment plans (ICR) and PAE (Pay As You Earn plans) for a period of time, but neither program results in debt forgiveness. The only reason you might want to sign up for either plan is if you want to make the lowest monthly payments, said Carolina Rodriguez, director of the Education Debt Consumer Assistance Program in New York, a nonprofit that helps borrowers.

If so, you can keep your ICR or PAYE until your plan expires on July 1, 2028. If you then switch to IBR or RAP, you will be entitled to a credit to forgive your previous payment.

Another difference with RAP is that if you move from RAP to another IDR plan, such as IBR, payments made under RAP will not count towards your loan forgiveness schedule, Mayotte said.

“While payments for existing plans such as IBR, PAYE, and ICR count toward the 30-year RAP forgiveness, RAP payments do not count toward the forgiveness timeline for other plans,” she said.

The current standard plan is very simple. Borrowers typically divide their debt into fixed payments over 10 years. Compared to the Department of Education’s plan, which makes payments based on a borrower’s income, this is often the quickest option for people to pay off their student loans.

However, the new tiered standard plan spreads your debt over fixed payments over one of four periods, depending on how much you owe.

Those who borrow up to $24,999 have a 10-year repayment period. However, those who owe between $25,000 and $49,999 will have 15 years to pay off their debt. Balances between $50,000 and $99,999 are repaid over 20 years. Debts over $100,000 have a repayment period of 25 years.

To decide which plan is best for you, consumer advocates say you should not only compare different monthly payment amounts based on the options available to you, but also the total cost over the life of your loan and when you’ll be debt-free. If you take out federal student loans after July 1, keep in mind that you will only have two options left for all your debts. RAP and tiered standard plans.

Of the two new repayment plans, “RAP should be your choice if you have a low income and a lot of debt,” said higher education expert Mark Kantrowitz.

People with smaller federal student loan balances may prefer a shorter repayment schedule under a graduated standard plan, he said.

However, if you are using the Public Service Loan Forgiveness Program, you can have your debt forgiven after just 10 years with RAP. This means your debt will be forgiven 20 years sooner than plans that would otherwise complete your loan forgiveness.