Federal Student Loan Borrowers Face Payment Restart
Millions of federal college loan borrowers haven’t had to pay down their loans since the pandemic struck, but that reprieve will end soon for all but low-income borrowers.
The pressure is now on borrowers who selected the SAVE (Saving on a Valuable Education) program to repay their federal loans. SAVE, which was rolled out in 2023, got tied up in lawsuits almost immediately, and ultimately, everybody in SAVE was pushed into forbearance limbo.
Millions of borrowers who enjoyed COVID and SAVE payment pauses may have wondered whether they’d ever have to repay their loans. This holding pattern, however, is about to change.
The SAVE program formally ended March 10 after the lawsuits were settled. Last summer, interest started accruing on SAVE balances, which was meant to encourage people to switch to a different plan. For most people, that wasn’t enough of a motivator.
In July, the federal government began sending 90-day notices to more than 7 million SAVE borrowers, telling them they need to leave SAVE and choose another federal repayment plan. The notices are being staggered, and the earliest people will be moved out of SAVE on Sept 29.
It’s critically important that SAVE borrowers pick a different plan on their own because if they don’t, they will be automatically placed in a fixed repayment option. Switching from the SAVE to the standard plan will typically result in dramatically higher payments.
The standard repayment program has traditionally been spread over 10 years, with borrowers paying a fixed amount based on what they owe. Unlike income-driven plans, a borrower’s yearly income was immaterial in the payment calculations.
The 2026-2027 federal school cycle, which began on July 1, introduced a new standard repayment program. The repayment length is tied to a borrower’s loan balance. Here is how it’s broken down:
A New Income-Driven Repayment Plan
Also new for the 2026-2027 school cycle was the introduction of the latest federal income-driven option call Repayment Assistance Program. RAP requires payments ranging from 1% to 10% of a borrower’s annual adjusted gross income. A borrower’s monthly payment will drop by $50 per dependent.
If a borrower’s calculated RAP payment is less than the total interest that accrued that month, the federal government waives 100% of the remaining unpaid interest. To enjoy that perk, borrowers must make full payments on time.
Because the excess interest via RAP is waived rather than added back to the loan, an individual’s principal balance will never grow due to unpaid interest. The federal government will forgive any remaining debt after 30 years (360 qualifying payments).
SAVE Borrower Choices
SAVE borrowers who want to stick with an income-driven plan can select the RAP program. They can also select one of the older IDR plans, some of which will eventually be mothballed on July 1, 2028.
In addition to RAP, here are the IDR choices:
Income-Based Repayment (IBR). Among the remaining legacy IDR choices, this one won’t be going anywhere. That’s because, unlike the next two remaining options, it was created by federal statute. Consequently, borrowers who select IBR shouldn’t have to worry that, down the road, they will be forced out like SAVE borrowers.
IBR payments are calculated based on a borrower’s discretionary income. Payments are 15% of discretionary income for loans taken out before July 1, 2014. And for loans dispersed after that time, the payments are based on 10% of discretionary income.
A loan will be forgiven after 25 years for the older borrowers and 20 years for those who borrowed on July 1, 2014 or later.
Pay As You Earn (PAYE). Pay As You Earn, created by an executive action of the Obama administration, requires monthly payments based on 10 percent of discretionary income. The payments can never exceed what a borrower would owe under the standard 10-year plan. Forgiveness kicks in after 20 years of payments
PAYE is being phased out and will permanently close on July 1, 2028. Borrowers enrolled before that date will be transitioned into IBR or RAP. The same fate awaits borrowers using the final option – Income-Contingent Repayment.
Income-Contingent Repayment (ICR). Income-Contingent Repayment (ICR) is the oldest federal repayment plan and also the least generous. The payments are 20% of discretionary income, or the amount a borrower would pay on a 12-year fixed repayment plan, adjusted for income. The repayment period is 25 years.
Which Payment Plan to Choose
For many borrowers, it can be tricky to determine whether a standard or IDR option is best for repayment. One way to choose the best option is to turn to a loan calculator. Check out the Federal Student Aid Repayment Calculator.
Here are the inputs your clients would share when using the federal calculator:
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Loan information that includes loan balance, average interest rate and disbursement date.
Another calculator to consider is at The College Investor, an excellent website for in-depth college financial news.
