New Student Loan Repayment Rules: Who Gets a Break — and Who Doesn’t
Federal student loan repayment is undergoing some major changes, and not every borrower will be affected the same way. Depending on when you borrowed, your income and your household circumstances, you could have different repayment options and a very different monthly payment.
Charles Hoff, a financial literacy counselor at DFCU Financial, said one of the biggest things borrowers need to understand is which rules apply to their particular loans. Here’s who may get some breathing room under the changing system, who could have fewer choices and what borrowers can do to prepare.
Learn More: Your Student Loan SAVE Plan Has Less Than 3 Months Left—Here's What To Do Next
Find Out: How Middle-Class Earners Are Quietly Becoming Millionaires — and How You Can, Too
Borrowers With Older Loans May Have More Options — For Now
One of the biggest dividing lines in loan repayment is July 1, Hoff said. Borrowers with loans issued before that date may still have access to additional repayment options, while borrowers taking out new loans on or after July 1, generally face a more streamlined repayment system. Borrowers should contact their loan servicer for details.
Another important date is that “income driven repayment plans will be reduced after July 1, 2028, to just the RAP, the Repayment Assistance Plan,” he said.
Older income-driven plans are being phased out. Borrowers should use the Federal Student Aid website or their servicer to determine which plans they personally qualify for.
Lower-Income Borrowers May Get Some Relief Under RAP
The new RAP ties payments to adjusted gross income (AGI), potentially making payments more manageable for lower-income borrowers. Payments range from 1% to 10% of AGI under the formula, with a $10 minimum payment for the lowest-income borrowers.
Hoff said, “The maximum 10% applies to those with AGI of $100,000 or higher, with no dollar limit on the monthly payment.”
Borrowers With Dependents Could Get Another Break
The RAP also takes household circumstances into account. The calculated monthly payment is reduced by $50 for each dependent, which could provide additional relief to some households. And, after 30 years, any remaining balance is forgiven for eligible borrowers, according to StudentAid.gov.
This is a good example of how households with similar incomes could wind up with different payments because of their circumstances.
New Borrowers Will Have Fewer Repayment Plans
The trade-off for simplifying federal repayment is that newer borrowers won't have as many plans to choose from. Borrowers who took out loans after July 1, or will, generally choose between the new Standard Repayment Plan and RAP, rather than the wider menu of repayment plans available to some existing borrowers.
“These two updated options in repayment are optional for current students entering repayment. After July 1, 2028, they will become the only options.”
A Lower Monthly Payment Isn't Necessarily the Cheapest Option
Borrowers who qualify for a smaller monthly payment shouldn't look only at what they owe each month. Extending repayment can mean staying in debt longer, so Hoff recommended comparing the long-term numbers before choosing a plan based purely on the lowest payment.
“Go straight to Amortization tables,” he said. “Run scenarios. I'm a strong believer if students do this, they will resist extending terms but will instead become determined to throw extra money on their student loans.”
People can also use the Federal Student Aid Loan Simulator to compare estimated monthly payments, repayment periods and total amounts paid under different plans.
If Your Payment Is Higher, Rework the Budget
Borrowers who don't get much relief from the new rules may need to find room in their existing budgets. Hoff recommended starting with the biggest expenses rather than automatically turning to credit cards or other debt to cover student loan payments.
His strongest example is housing, which should be a priority, and may not look the way borrowers want at first. “Most of the world lives with extended family — living alone is a privilege. You have to earn the right to live alone by way of sound money management.”
Otherwise, he stressed that “deferred gratification is the key to wealth.” People with tight budgets should look for expenses that can become discretionary.
Don't Ignore Your Loans While the Rules Are Changing
No matter which repayment rules apply, it’s never a good idea to ignore the debt. Borrowers should check their loan status, determine which repayment plans they're eligible for and contact their servicer if the expected payment doesn't fit their budget.
For borrowers who can afford it, set up autopay and bump up the payment whenever you can, even by a small amount. Every extra dollar you send beyond the minimum shortens the timeline and cuts the total you’ll pay.
Essentially, relief will depend on a variety of factors. The key is to find out which rules apply to your loans before payments become a bigger financial problem.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion: