Millions of student loan borrowers will need to switch to new repayment plans starting July 1 – and the plan you choose could make a huge difference in how much they owe each month.
Roughly 7 million people enrolled in the now-defunct Biden-era SAVE program will need to enroll in new plans as their payments resume after nearly two years in limbo.
President Trump’s One Big Beautiful Bill Act has cut down a handful of repayment options to just two, including the existing Income-Based Repayment plan, or IBR, and his new Repayment Assistance Plan, known as RAP.
“The benefit of this is pretty simple: You only have two options,” Erica Sandberg, a consumer finance expert at BadCredit.org, told The Post.
“When you’ve got fewer options, sometimes that can be a relief. Although I am hearing some people worrying about being able to afford their payments.”
Borrowers have been panicking since the change in plans could hike monthly bills by roughly $350, according to an analysis published late last year by advocacy firm Protect Borrowers.
Starting July 1, federal loan servicers will send notices to SAVE enrollees with deadlines on when they must take action. If borrowers do not select a replacement payment plan, the government will simply shift them into the standard IBR plan, which has been tweaked.
The IBR plan requires borrowers to pay 10% of their discretionary income toward their balance for 10 to 25 years, depending on the size of the loans. For loans that were taken out before July 1, 2014, borrowers will pay 15% of their discretionary income over 25 years.
Prior to the GOP bill, the standard plan used a 10-year repayment period, regardless of loan size.
Otherwise, borrowers can switch into the brand-new RAP plan, which has graduated payments ranging from 1% to 10% of adjusted gross income – with higher payments for bigger salaries.
But the repayment term can stretch up to 30 years.
“That loan will be with you for decades and cost you a lot of money in interest,” Sandberg told The Post.
“The big problem is it will be a perpetual debt. That can be really problematic, something that’s going to carry with you into the future when you want to buy a house, buy a car, help your child with a wedding.”
RAP does not adjust for inflation and it requires people with extremely low incomes to make a token payment of $10 a month, while they don’t have to make any payments on the standard plan.
It also offers just a $50 payment reduction for each dependent on a tax return, while the standard plan includes a larger adjustment.
But the most important factor for borrowers to consider is RAP’s tiered structure, which can mean huge differences in monthly payments for people with virtually identical salaries.
A borrower with an adjusted gross income of $40,000 would pay $100 a month – but if they made $40,001, those charges would jump to roughly $133.
“Definitely take a look at your income versus your debt and how much you may end up being responsible for on a monthly basis, because the difference is going to be enormous,” Sandberg said.
RAP does not have a payment cap, meaning many SAVE borrowers who make the switch could end up paying a higher cut of their income than they previously did.
Many ex-SAVE borrowers might want to opt into Pay as You Earn, also known as PAYE, or the Income-Contingent Repayment plan for the next two years until they shutter in July 2028.
Borrowers with extremely low incomes could do well on IBR, since they will qualify for $0 payments, while middle-income borrowers who are in a better position to pay off their loans before the 20-year mark might be better-suited for RAP.
RAP is more of a commitment, since payments will not count as qualifying payments if borrowers decide to switch to IBR later on.
SAVE borrowers can switch into an IBR plan now. Those who want to join the RAP plan will need to wait until July 1.
In the meantime, the best thing borrowers can do is stay on top of their monthly payments, Sandberg advised.
“Make sure you get your payments in on time, whatever plan you use. It’s essential to keeping your credit in good shape,” she said.
If borrowers can’t make their monthly payments, “you better go back to that lender and start negotiating with them so you don’t go into default.”
