How the Reconciliation Law Changes the Federal Student Loan Repayment System

RAP’s Poorly Designed Payment Formula = Disproportionate, Regressive Payment Spikes

RAP takes a never-before-seen approach to calculating a borrower’s monthly income-based payment. Most concerningly, it will no longer set aside a certain percentage of a borrower’s income from being counted as “available” to be put toward their payments. Instead, it will base a borrower’s payment on their full income (AGI), increase the size of the payment as their income increases (see below), $10,000 increments, then layer on a flat reduction of $50 a month per dependent child. 

This replaces the way that all prior income-based plans calculated monthly payments: excluding a base portion of a borrower’s annual income for basic needs (using the pre-existing federal poverty level) and then applying the same percentage across leftover (“discretionary”) income. Prior plans reflected a common-sense approach to student debt repayment: a borrower must be able to preserve the income that allows them to afford food, housing, shelter, and other necessities before making their student loan payment. 

It also means prior income-based repayment plans avoided the “cliff effect” pitfalls of RAP’s approach. RAP will have borrowers pay a changing percentage of their total income as it increases. This will result in a well-known “benefits cliff”—where a small change in income has a disproportionate negative effect on a recipient’s benefits that creates unintended incentives to avoid that outcome.  

In RAP, a borrower will see a disproportionate spike in their monthly payment whenever they move across the proposal’s arbitrary income thresholds, outlined below. 

Take two borrowers, one of whom earns $1 more than the other (in this example, neither have dependents). If the first borrower’s annual income is $30,000, their maximum monthly payment would be $50, while a second borrower who earns $30,001 would pay $75 per month. (Note: the first borrower could easily become the second because of a few extra dollars in a single paycheck.) 

The most obvious way around these spikes would’ve been to mirror the federal income tax system, where, as one’s income moves across brackets, they only pay an increased percentage on the incremental income in that higher bracket. However, that would’ve been more expensive—contrary to the aim of the budget reconciliation bill, which was to fund corporate tax breaks by cutting programs on which millions of Americans rely. 

The “RAP” TRAP: A Sneaky Lifetime Debt Sentence

To give credit where it’s due: RAP is an improvement upon House Republicans’ original repayment plan proposal by including a 30-year maximum repayment term (as opposed to that proposal’s explicit lifetime debt trap).  

All prior income-based plans have featured this “light at the end of the tunnel” where any remaining balance is discharged after 10-25 years of payments, depending on the plan. This is critical for borrowers whose incomes remain low over the course of their lives (often, individuals who did not complete a degree, and therefore received no financial benefit in return for their borrowing). By expanding the maximum term to 30 years, RAP will make it harder than ever for low-income borrowers to retire their debt. 

Proponents of RAP claim that most borrowers won’t ever hit that three-decade mark because they’ll pay off their debt far before. This is because RAP requires borrowers to make higher monthly payments compared to prior plans, including even the lowest-income borrowers (those living on less than $10,000 a year). The claim also assumes those same borrowers will be able to make those higher payments on time—payments the lowest-income borrowers cannot afford without sacrificing basic necessities—for years at a time.  

RAP also assumes that the Education Department (or any federal agency) is adequately resourced and staffed to properly administer a complex multi-decade repayment period. Even before the Trump Administration gutted the Department by half, borrowers have long faced significant bureaucratic hurdles to enrolling and staying enrolled in income-based plans.  

We know that the longer a borrower is required to remain in the repayment system, the more likely they are to fall out of that plan, get kicked into a plan with an unaffordable payment, and face the severe consequences of default. These risks have historically been compounded by servicing errors, which are driven in part by a shortage of funds for the Office of Federal Student Aid, which this bill at least acknowledges by providing some additional funding for loan servicing. 

All told, the RAP proposal is not much of a safety net. When it’s the only thing standing between borrowers and loan default, we can expect many more borrowers to enter the draconian student loan collections system, in which many will be trapped. 

We’ll be closely monitoring the Education Department’s implementation of these changes and providing additional resources to help student loan borrowers navigate their changing options. Stay tuned for more.