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Interest Subsidy and Equalized Principal Payment<\/h2>\n
Two features give RAP an advantage over IBR for some borrowers.<\/p>\n
Interest subsidy. <\/strong>If your full, on-time payments do not cover the interest accrued since your last due date, the Department waives it. If you make each monthly payment on time, your balance should never exceed what you owed when you first entered RAP.<\/p>\nReconciliation of original payment. <\/strong>When your full, on-time payments reduce your principal balance by less than $50, the Secretary of Education adds a matching contribution to bring the principal reduction up to $50 (or the total amount you paid, if less than $50). Make the required minimum payment of $10, your principal balance is reduced by $10. <\/p>\nHunt: <\/strong>Paying more than your required monthly payment may reduce or eliminate both benefits. Any amount over the bill goes first into accrued interest, then into principal, which may reduce or eliminate the subsidy and matching payment for that month.<\/p>\nGround level:<\/strong> If you’re on a RAP plan, paying extra probably isn’t in your best interest. Use the extra money to start investing. If your goal is loan repayment, consider a fully amortized repayment plan like the Standard Plan.<\/p>\n<\/div>\n\n
Married Borrowers: How Spouse Income Works<\/h2>\n
Married borrowers need to pay attention to how filing status shapes payments.<\/p>\n
Joint filer, both spouses have federal student loans.<\/strong> The calculation uses joint AGI, but payments are reduced to reflect either spouse’s own federal loan balance. The burden of monthly payments is shared by both the borrowers. For example, let’s take a couple with two children who together earn $120,000. You both have the same debt of $30,000. Your combined monthly student loan payments will be $900 per month, or technically $450 each.<\/p>\nJoint filer, only one spouse has federal student loans.<\/strong> Joint AGI still drives the payment, and there is no spousal-credit deduction to soften it. This scenario generates the highest RAP payment for a married borrower. So, in the situation above, $120,000 is the combined AGI with two children, but the monthly payment is still $900 \u2013 just for one borrower.<\/p>\nSeparate filer. <\/strong>Only your income and the dependents you claim on your return count. Filing separately can reduce RAP payments faster when the non-borrower spouse earns more, but it can also cost you at tax time by disqualifying you from credits and deductions (including the student loan interest deduction). Run both scenarios before choosing.<\/p>\n<\/div>\n\n
What to know about switching plans<\/h2>\n
Existing borrowers with RAP-eligible loans can opt for RAP when it goes live. Payments already made under IBR, PAYE, ICR, or SAVE typically count toward the RAP’s 360-payment discharge limit, so borrowers don’t start over from scratch. <\/p>\n
However, given that the RAP has a 30-year time frame compared to the 20 or 25-year IBR, it may make more sense to choose the IBR going forward. Here follows the RAP vs IBR decision tree.<\/p>\n
The department has indicated that more details on payment rules are coming, so keep an eye out for updates if you’re nearing the finish line of another income-driven repayment plan.<\/p>\n<\/div>\n
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PSLF, Loan Forgiveness, and Taxes<\/h2>\n
Payments under RAP generally count toward Public Service Loan Forgiveness (PSLF), provided they are made on time and in full. <\/p>\n
For RAP’s own time-based loan forgiveness, any remaining balance is forgiven after being paid in full, at 360 qualifying times over a minimum of 30 calendar years. <\/p>\n
However, you may have to pay federal and state income taxes on the amount discharged. This is called the student loan tax bomb and you should plan accordingly. See the College Investors Tax Bomb Calculator for an estimate.<\/p>\n<\/div>\n
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Frequently Asked Questions<\/h2>\n
Will the interest be capitalized if I leave RAP for another repayment plan?<\/strong><\/p>\nThe Department for Education has not yet published definitive guidance on the capitalization treatment when a borrower leaves a RAP. Under the 2023 capitalization rule, most plan-change capitalization events for federal student loans were eliminated, which suggests that unpaid interest will remain as interest rather than being added to the principal when switching plans. We will update this answer once the Department confirms the rule specifically for RAP.<\/p>\n
Do I need to consolidate my loans to enroll in RAP?<\/strong><\/p>\nNo, Direct Subsidized, Direct Unsubsidized, Graduate PLUS Loans, and Direct Consolidation Loans that do not include the Parent PLUS Loan are all eligible for RAP in their own right. Consolidation isn’t really necessary except as a way out of student loan default.<\/p>\n
What will happen to my interest subsidy during the moratorium or pause?<\/strong><\/p>\nThe interest subsidy is applicable only on months in which you receive a RAP bill and make full, timely payments. The interest accrued during moratorium, moratorium, or any period when your loan is not in active repayment status is not subsidized. Those months also do not count toward the 360-payment discharge limit.<\/p>\n
What happens if I miss a payment or pay less than the amount billed?<\/strong><\/p>\nMissed or partial payment makes you pay interest subsidy and principal benefit for that month. That month does not count toward your 360-payment discharge limit or PSLF. The standard default and default rules still apply on top of those missed benefits.<\/p>\n
Can I make extra payments without losing the interest subsidy?<\/strong><\/p>\nbe careful. Any amount paid over and above your billed monthly payment is first applied to the interest earned, then to the principal and may reduce or eliminate both the interest subsidy and the $50 matching principal payment for that month. <\/p>\n
Can I switch between RAP and Tiered Standard Plan?<\/strong><\/p>\nYes. Borrowers with RAP-eligible loans can generally select any plan and switch between them, although the Department of Education generally requires all of your Direct loans to be on the same plan (with the Parent Plus exception mentioned earlier). <\/p>\n
What if my income changes mid-year?<\/strong><\/p>\nRAP payments are recalculated annually based on updated income and dependent information. If your income drops significantly in the middle of the year (job loss, reduced hours, or similar) you can recertify early so your payment adjusts without waiting for the next annual cycle. If your income increases, use this to your advantage because you won’t see your payments increase until your next annual cycle. <\/p>\n
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