A Bad “RAP”: Everything Wrong with House Republicans’ Poorly Designed “Repayment Assistance Plan”

On April 29, the House Committee on Education and Workforce advanced a as part of the Republican party’s broader effort to pass a reconciliation package to implement President Trump’s domestic policy agenda.  

One major part of the proposal is its restructuring of the federal student loan repayment system. For new borrowers, the proposal would eliminate access to all existing income-based plans and replace them with a new “Repayment Assistance Plan” (RAP). It would also collapse the current standard, graduated, and extended repayment plans into a single “standard” plan with varying repayment lengths based on a borrower’s loan balance (we’ll write more about that in a future post). 

Under this new system, borrowers would be stuck choosing between a non-income-based “standard” payment (which would be unaffordable for many) and an income-based payment that would also be unaffordable for many.

This post focuses on the RAP proposal, which departs radically from the core design tenets of all existing income-based repayment plans. Namely, it would scrap the formula that all existing income-based plans to date have used to determine a borrower’s monthly payment and replace it with one that: 

1. Fails to cushion the lowest-income borrowers from choosing between basic necessities (such as food and housing) and student loan payments, thereby defeating the primary purpose of an income-based plan, which is to keep struggling borrowers out of default; and 
2. Would instead determine a borrower’s monthly payment using a strange formula in which their payment amount spikes if their income increases even slightly, thereby creating a “cliff effect” (a hallmark of poor policy design), and then layering on a low flat-rate “dependent child” deduction that would fail to sufficiently protect those with very low incomes. 

RAP would also extend a borrower’s maximum repayment term from the current 10-25 years to 30 years, which would likely trap the lowest-income borrowers in debt for decades. While it’s true that borrowers who can afford their payments could retire their debt long before the 30-year mark, the lowest-income borrowers—again, those whom income-based plans are ultimately meant to protect—could be stuck for a long time if they struggle to keep up with the increased payments and fall into default.

The RAP proposal would also be extraordinarily complicated for the federal government to administer, especially in the wake of ongoing efforts to gut—and ultimately shutter—the Education Department. The federal student loan system is in a state of dysfunction and chaos. If lawmakers are truly looking to get borrowers back into loan repayment, the last thing they should do is charge the Education Department with enacting an entirely new, poorly designed, and complex repayment system. 

If Congress is really looking to build a better income-based plan—one that prevents defaults by keeping payment affordable, asks those who earn more to pay more, and ultimately helps borrowers retire their debt more quickly—they could draw on decades of research showing what works to keep borrowers in repayment and out of default. But it would cost far more than they’re looking to spend here. (Recall the overarching goal of this reconciliation effort: hitting that “savings” target through spending cuts.) 

The RAP proposal’s poor design choices negate the glimmers of good: provisions to address the problem of negative amortization, in which a borrower’s income-based payment is too low to cover the interest accruing on their loan, thereby making their balance grow even as they make consistent monthly payments. (A worthy goal, and one that the SAVE Plan addressed via its accrued interest subsidy.) The proposal also includes a worthwhile “principal match subsidy” to ensure a borrower’s principal balance decreases each month, even if their payment is too low to touch principal. Unfortunately, these good ideas are overwhelmed by the other attributes of the plan. 

RAP’s Approach Would Defeat the Purpose of an Income-Based Repayment Plan

Under our current system of financing higher education—where millions of students face an “affordability gap” between college costs and available aid—the federal student loan program serves as a critical access tool. Without it, millions of students could not afford to enroll in college.    

The first income-based repayment plan was created in the early 1990s in response to a growing problem: while most borrowers could pay off their debt, too many federal student loan borrowers couldn’t afford their monthly payments under “standard” loan repayment plans. This meant many borrowers faced a monthly choice between making their student loan payment and paying other bills to cover their basic needs, including food, housing, utilities, medical care, transportation, or child care. Many such borrowers could not keep up and their loans went into default, which comes with severe consequences and is difficult to resolve.  

That’s where income-based plans came in: they were designed to adjust a borrower’s monthly payment by their income and family size to enable borrowers to stay current on their loans and avoid default, even in times of financial hardship or income fluctuation. The first widely available income-based plan was passed by Congress in 2007 in response to rising debt levels. Since then, both Congress and the Education Department have made additional changes to improve the system, with the consistent goal of helping borrowers stay on track over the course of their financial life.  

Income-based plans also provide a release valve—after up to two-plus decades of payments—for those whose borrowing does not pay off. Despite the ongoing need to strengthen and improve these plans, they have indeed worked as designed: borrowers in income-based plans default at much lower rates than those in non-income-based plans.  

However, for an income-based plan to work, a borrower’s monthly payment must actually be affordable. If it isn’t, we know borrowers will continue to default. While the RAP proposal technically gives borrowers the option of making “income-based” payments, our comparison of six example borrowers below illustrates how much higher their payments under the RAP plan are compared to the SAVE plan.  

As living costs continue to rise and families struggle to keep up, making payments less affordable undermines the number one goal of income-based plans: to keep borrowers in good standing. It will likely do the opposite: push more borrowers than ever into the nightmarish world of loan default. 

Proponents of the RAP approach tout this as “enabling borrowers to repay their debt more quickly,” which is another way of saying it requires much higher payments. This design approach reflects a fundamental misunderstanding of the purpose of income-based plans. Borrowers can already pay down their debt more quickly under other plans, while income-based plans exist as a safety net for when higher payments are not an option. In exchange, borrowers enrolled in income-based plans often do pay for longer and pay more interest over the life of their loan.  

Borrower Examples: How Monthly Payments Would Spike  

To better understand how the RAP proposal would affect borrowers, we conducted a preliminary analysis of how six example borrowers would fare compared to the SAVE Plan. While the SAVE Plan is on its last legs in the courts, it offers a salient comparison point, as it reflects the most recently designed income-based repayment option—and the plan that more than eight million borrowers were enrolled in before the courts paused it. 

In forthcoming pieces, we’ll show how our example borrowers would fare under RAP compared to other income-based plans, including the REPAYE and Income-Based Repayment (IBR) plans. While monthly payments vary under prior plans depending on a borrower’s debt and circumstances, all prior plans were designed to keep struggling borrowers engaged in repayment—and out of default—even when their income was very low. In contrast, RAP would require those borrowers to pay the most of any plan: a recipe for default disaster. 

Under the RAP proposal, all our example borrowers would see their monthly payments increase.