Four Times the Cost, Twice the Time: The RAP Shift for $12,000 Borrowers
How replacing SAVE with RAP reshapes repayment, forgiveness, and the financial future of low-balance student borrowers
Introduction
The shift from President Biden’s SAVE Plan to President Trump’s proposed Repayment Assistance Plan (RAP) has major implications for students leaving college or community college with $12,000 or less in debt. The potential costs to taxpayers also differ substantially, as SAVE offers faster forgiveness and shifts more of the burden to the federal government, whereas RAP requires much longer repayment and shifts more costs to borrowers.
Borrower’s Circumstances
We consider a student borrower with $12,000 in federal student loan debt, likely someone who attended a community college for two or three years or completed a few years at a four-year college.
The borrower begins repayment with a $40,000 annual salary that grows at 2% per year. Because the loan balance is $12,000 or less, the borrower would be eligible for forgiveness after 10 years under the SAVE plan.
The interest rate on the loan is 6.37 percent, the current interest rate on undergraduate federal student loans.
Other key factors the treatment of forbearance periods, the income-based payment formulas, and the rules for forgiveness that differ sharply between SAVE and RAP.
Rules of the Programs and Their Effects
SAVE Plan (updated for forbearance rule):
- Payments based only on income above 225% of the federal poverty line
- Low payment rate of 5% of discretionary income for undergraduate loans
- No negative amortization for compliant payers
- Forgiveness period depends on original debt size:
- 10 years for debts up to $12,000
- Increases by 1 additional year for each $1,000 borrowed above $12,000
- Borrowers who pause payments (e.g., through forbearance) typically extend the repayment clock because they do not make qualifying payments during those months.
RAP Plan:
- Payments based on all income, with tiered rates rising from 1% to 10% as income increases
- Minimum payment of $10 per month
- No negative amortization for compliant payers
- Forgiveness after 30 years for all borrowers, regardless of loan size
- Months in forbearance do not count toward the 30-year clock.
Analysis
The initial monthly payments for the four repayment options are:
- $26 under SAVE
- $50 under RAP
- $88.55 under a 20-year conventional plan
- $135.47 under a 10-year conventional plan
Both income-driven repayment (IDR) programs—SAVE and RAP—are far more affordable than either conventional loan option, and a student borrower, especially one living in a high-cost area, will almost certainly choose an IDR plan.
The lifetime repayment costs are approximately:
- $16,256 for the 10-year loan
- $21,252 for the 20-year loan
- $5,024 under SAVE
- $26,121 under RAP
Under SAVE, the student borrower would have $12,000 forgiven after 10 years. The SAVE payments are always less than the interest, and no principal on the loan is reduced during the 10-year payment period.
Notably, a SAVE borrower with $12,000 or less in debt would incur substantially higher borrowing costs by returning to school and taking on additional debt because of both the extra borrowing and the increase in the number of years until possible discharge. This aspect of the SAVE program could discourage some people from pursuing additional education.
The RAP borrower, by contrast, would make payments for 24.3 years, with no loan forgiveness because under RAP, no debt is discharged until 360 payments have been made.
Conclusion: Main Impacts of the Policy Change
Democrats and Republicans are really far apart on student debt. This gap is especially evident when comparing outcomes from SAVE to outcomes from RAP for a borrower with a few years of post-secondary education and $12,000 or less in debt.
The decision to replace SAVE with RAP, implemented by President Trump and the Republican Congress, would increase lifetime student loan payments by a factor of four and more than double the repayment period.
These calculations assume that student borrowers make all full payments on time. Failure to make complete, timely payments would result in an increase in the balance of the student debt. It is highly likely the RAP borrower will miss more payments than the SAVE borrower both because the payment is higher and 2025 tax bill eliminated forbearances, which would allow a borrower experiencing financial distress to miss payments without incurring interest.
The case could be made that the SAVE subsidy is excessive and too costly to taxpayers. However, the RAP program provides no real relief at all. A worker forced to repay a $12,000 student loan in full for over 24 years will almost certainly live paycheck to paycheck and be unable to save for retirement.
The better way, described in the post below, involves modifications to conventional student loans to make them more affordable for students beginning their careers, and modifications to IDR loans to reduce costs to taxpayers.
Read the proposal here:
Consider becoming a paid subscriber to this blog to receive substantial investment advice, like the advice in this article:
https://bernsteinbook1958.substack.com/p/four-quality-stocks-in-the-valley
Also, take advantage of the one-month-free coupon:
https://bernsteinbook1958.substack.com/subscribe?coupon=fb965b7d