The second option available to future borrowers is an income-driven repayment plan called the Repayment Assistance Plan. (I will refer to this plan as RAP, although one could make the argument that The Repayment Assistance Plan could have the acronym TRAP. I don’t make the rules.) This plan is made under the income-based repayment authority, and RAP payments count toward PSLF, as do payments made in current income-driven plans.
There are a number of elements in this plan that are different from or do not exist in the currently available suite of income-driven plans, and many of them result in higher payments for the lowest-income borrowers.
LONGER TIME TO FORGIVENESS: RAP would forgive remaining balances after 30 years of payments for all borrowers—5-10 years longer than existing income-driven plans (and even longer for some lower-balance borrowers enrolled in SAVE). Borrowers would pay a percentage of their adjusted gross income based on the level of that income:
- Annual income of not more than $10,000: Minimum payment of $10 monthly/$120 annually
- Annual income of $10,001 – $20,000: 1% of income (although borrowers would pay the minimum payment until their incomes reach $12,001)
- Annual income of $20,001 – $30,000: 2% of income
- Annual income of $30,001 – $40,000: 3% of income
- Annual income of $40,001 – $50,000: 4% of income
- Annual income of $50,001 – $60,000: 5% of income
- Annual income of $60,001 – $70,000: 6% of income
- Annual income of $70,001 – $80,000: 7% of income
- Annual income of $80,001 – $90,000: 8% of income
- Annual income of $90,001 – $100,000: 9% of income
- Annual income of $100,001+: 10% of income
While those with higher incomes will repay their balances faster, the lowest income borrowers—those who are least likely to have received a return on their higher education investments—are most likely to be trapped in repayment for extended periods.
MINIMUM PAYMENT: Setting a minimum payment (of any amount) creates a tradeoff between keeping the most vulnerable borrowers out of default and ensuring borrowers are connected to the loan system. Today, borrowers with incomes under a certain threshold (100% – 225% of the federal poverty guidelines) are permitted to make $0 monthly payments on income-driven plans. RAP has a minimum monthly payment of $10 for all borrowers, which would be a major shift in how income-driven plans work, and there are a host of dynamics that policymakers should consider.
Those who owe and make the least—the borrowers currently eligible for $0 payments—are most likely to default and remain trapped there while the government collects relatively little. These same borrowers are also the least likely to know about tools to help them stay on track in repayment, such as income-driven repayment plans. Accessing these plans is an important default prevention tool, especially because borrowers can opt into data sharing, allowing the IRS to share limited tax information with the Department of Education to both streamline getting into a plan and automate annual recertification. This process works more efficiently if borrowers are eligible for $0 payments, and the ability for borrowers to make $0 payments also allows servicers to target their support and resources more effectively.
Creating a mechanism to keep borrowers connected to the loan system (or at the very least to opt into data sharing) is also important, given that borrowers who have not yet opted in could fail to recertify for income-driven plans in the future and face subsequent spikes in their payments. In addition, many of those currently making $0 payments will owe money over time as their incomes rise. A connection with the system would help ensure they do not miss these payments when they become due. Having a reliable way to contact borrowers is also important for communicating with them about programs for which they might be eligible. For example, in 2022, the Biden administration launched the temporary Fresh Start program, which allowed borrowers to more easily exit default, but accessing the contact information for many borrowers in default was a challenge.
A student loan system that utilizes a minimum payment as a mechanism to keep borrowers connected must consider the consequences of nonpayment. Under the proposed bill, missing $90 in payments (missing the $10 minimum monthly payments for the nine months it takes to default), sends the lowest-income borrowers down a path to not only have their federal benefits garnished but also to have far more than $90 taken from their Social Security and the Earned Income Tax Credit payments. A less punitive system of default—including one that has more capacity to screen borrowers who might be eligible for discharges—or a different means of ensuring borrowers are connected, would better balance the tradeoffs outlined above.
NO PROTECTED INCOME: RAP’s payment schedule does not include protected income, which means that borrowers start making payments on their first dollar of income, leaving less for household needs. The current income-driven repayment plans base payments on a borrower’s discretionary income. They protect a certain percentage of income—between 100% – 225% of the federal poverty guidelines—from being counted toward payments to ensure borrowers can meet their basic expenses before repaying their student loans.
The lowest income borrowers are better off under a plan that protects a portion of income, even if that plan charges a higher percentage of discretionary income. For example, a single borrower in PAYE, where 150% of the federal poverty guideline is protected, would start making payments once their annual income was above $23,475. That same borrower would start making payments on their first $1 of income under RAP, and those making just $12,001 per year—approximately 75% of the federal poverty guidelines and half of what is currently required under PAYE—would begin paying more than the minimum.
These low-income families are likely eligible for safety net benefits, including Medicaid and the Supplemental Nutrition Assistance Program (SNAP), meaning the government has determined that they do not earn enough to meet their basic expenses. Yet the Student Success and Taxpayer Savings Plan is requiring them to make payments under RAP. This decreases the effectiveness of taxpayer-funded benefit programs: Federal dollars being offered with one hand are essentially being taken away by another.
At the same time, the House bill eliminates economic hardship deferments and unemployment deferments, providing fewer options for those experiencing financial distress and struggling to make payments. (Economic hardship deferments count toward forgiveness in current income-driven repayment plans. The federal regulation that created the SAVE plan, currently under an injunction, also permits unemployment deferments to count toward income-driven repayment forgiveness.)
TIERED REPAYMENT AMOUNT BY INCOME: RAP’s payment schedule creates a series of cliffs that penalize and disincentivize small increases in income. While RAP ensures those with lower incomes pay lower percentages of that income, it was not designed like the U.S. tax code, which taxes different portions of a taxpayer’s income at different rates. In RAP, when a borrower’s income increases by as little as $1 into the next income tier, the borrower’s entire income, instead of just the marginal dollar, becomes “taxed” at the higher rate.
For example, a single borrower who makes $79,999—close to the median for someone with a college degree—would pay 7% of their income, or $467/month, while a similar borrower making $80,001 would pay 8% of their income, or $533/month. A $2 increase in annual income would lead to this borrower owing approximately $800 more annually toward their loans. Similar jumps happen at the edge of all of the income bands in RAP (Figure 4). A $2 increase in income for a borrower with the typical income for someone who did not complete a degree or credential would increase annual payments by $400.
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