Seeing a government agency run a marketing campaign that resembles a startup pitch is somewhat ironic. The Education Department posted last week, “The cycle of student loan debt ends,” addressing a number of grievances, such as uncontrollably high interest rates, ballooning balances, and unfulfilled payments, before announcing its solution, the Repayment Assistance Plan, or RAP, which will go into effect on July 1. It reads nicely. It’s made to be easy to read. However, anyone who has worked in federal loan servicing knows that the simple version of a story seldom makes it past the fine print.
Following Washington’s dismantling of the majority of the previous repayment system, RAP is one of two remaining options. The other is the Tiered Standard Plan, which simply extends fixed payments over longer periods of time, such as 10, 15, 20, or 25 years, based on the amount borrowed. The Biden-era SAVE plan, which briefly rose to the top of the nation’s repayment options before a coalition of states sued it out of existence, is no longer in place. When the plan’s termination was finalized, nearly 7 million people were still enrolled, and the majority of them are only now learning that the clock has begun.
Timing is something that the Education Department’s promotional language omits. After 30 years of payments, RAP forgives remaining balances—a full ten years longer than what borrowers received under SAVE or Income-Based Repayment. The majority of a working life is thirty years. It’s difficult to ignore how that figure varies depending on who you ask. For example, a 24-year-old with a teaching degree might dismiss it, but someone who has already completed ten years of repayment might feel as though the goalposts have shifted.
For some borrowers, the principal-matching and interest-waiver features will actually be beneficial. However, they are only applicable when monthly payments are made in full and on schedule. Benefits may vanish if you miss a billing cycle, pay an additional month, or enter forbearance. A federal program based on stringent conditionality, the kind of “read the terms” warning typically associated with credit card offers rather than government assistance, has an almost antiquated feel to it.
The RAP scale’s monthly payments, which range from 1% to 10% of adjusted gross income, may seem more lenient than they actually are. Payments for borrowers making between $50,000 and $60,000 could be between $208 and $250 per month, which is significantly more than what some SAVE enrollees had become accustomed to paying but not catastrophic. The term “payment shock,” which has been coined by critics, is understandable.
None of this takes place in a vacuum. Grad PLUS loans are vanishing. Particularly for graduate students in professions like social work and nursing, borrowing caps are becoming more stringent. New borrowers will no longer be eligible for economic hardship deferments. When taken as a whole, the picture resembles a structural overhaul of how Americans pay for higher education rather than a single new plan that places more of the risk on individual borrowers and less on the federal safety net.
How well any of this will actually work out is still up in the air. A 90-day window seems short considering how many millions of people need to take action, and servicers are already handling a backlog of plan-switch applications. The Education Department appears certain that a broken cycle is fixed by the new system. No one can predict whether borrowers will feel that way in three or thirteen years.
