From SAVE to RAP: How New Repayment Rules Reshape Student Debt Outcomes for a Typical Undergraduate Borrower
A closer look at monthly payments, lifetime costs, and the trade-offs for a typical undergraduate entering repayment under changing federal policies
Abstract
The shift from the Biden administration’s Saving on a Valuable Education (SAVE) plan to the new Repayment Assistance Plan (RAP) program alters monthly and long-term repayment patterns for student loan borrowers and costs to taxpayers. The paper describes both the SAVE and RAP programs and considers ramifications for a “typical” undergraduate student borrower with a total of $35,000 in student loans. An analysis based for the typical student loan borrower will not be reflective of the impact of these policy changes on student borrowers who experience slow career growth or financial hardships, which impede on-time payments.
Introduction
The Trump Administration and the Republican Congress eliminated the SAVE student loan proposal and replaced all Income Driven Replacement Student loan plans with the new RAP plan. This post explains differences between SAVE and RAP and the implications of the new plan on a “typical” person entering the workforce with an undergraduate degree and $35,000 in debt.
Biden’s SAVE Plan
The Saving on a Valuable Education (SAVE) plan was designed to make federal student loan repayment more affordable and to prevent balances from ballooning.
Income shield: Payments are based only on income above 225 percent of the federal poverty line, so low-income borrowers often pay little or nothing.
Low payment rate:
5 percent of discretionary income for undergraduate loans
10 percent for graduate loans
Mixed borrowers pay a blended rate
No negative amortization: If your payment doesn’t cover the interest, the unpaid portion isn’t added to your balance. This provision only applies to people making their full monthly payments. Loans will still negatively amortize if borrower does not make payments.
Faster forgiveness: Debts of 12,000 dollars or less are forgiven after 10 years; larger debts require up to 20–25 years.
Spousal rules: Filing taxes separately lets borrowers exclude a spouse’s income but reduces the household size counted for the income shield.
SAVE’s generous income protection and shorter forgiveness timeline helped many borrowers keep monthly bills low and avoid runaway loan balances.
Trump’s RAP Plan
The Repayment Assistance Plan (RAP), established by the 2025 tax law, will replace SAVE for new borrowers starting in July 2026.
No income shield: Payments apply to all income, not just earnings above a protected threshold.
Tiered payment rates:
1 percent of income for 10,000–20,000 dollars
rising by 1 percent for each additional 10,000-dollar tier
up to 10 percent for incomes above 100,000 dollars
No negative amortization: If your payment doesn’t cover the interest, the unpaid portion isn’t added to your balance. This provision only applies to people making their full monthly payments. Loans will still negatively amortize if borrower does not make payments.
Minimum payment: Everyone owes at least 10 dollars a month, even at very low incomes.
Dependent deduction: A modest 50-dollar monthly deduction per dependent child.
Forgiveness: Requires 30 years of payments for forgiveness (unless eligible for Public Service Loan Forgiveness at 10 years).
For many new graduates, especially those with lower starting salaries, RAP means higher monthly payments and a longer road to forgiveness compared with SAVE.
Why Negative Amortization Matters
Under older income-driven repayment (IDR) plans, if your monthly payment was too small to cover interest, the unpaid interest piled up, increasing your balance over time—an effect called negative amortization.
Both SAVE and RAP were designed to limit this problem, but there’s a crucial difference.
SAVE payments are much lower than RAP payments, hence there is a much higher probability that a SAVE borrower will maintain payments during periods of financial distress and prevent negative amortization.
In addition to replacing SAVE with RAP, the Republican congress eliminated forbearance periods—temporary pauses in required payments—during spells of job loss or financial hardship. Loans in forbearance do not negatively amortize.
The most vulnerable student loan borrowers tend to miss payments sometime during their lifetimes. The combination of higher RAP payments, an increase in the number of on-time payments for forgiveness, and the elimination of forbearances will result in more student borrowers maintaining debt for a prolonged period.
Analysis: What the Numbers Look Like for a Typical New Graduate
To understand the practical impact of replacing SAVE with RAP, we look at a hypothetical borrower entering repayment with:
Household size: 1
Adjusted gross income (AGI): 62,000 dollars per year, growing at 2 percent annually
Loan balance: 35,000 dollars in Federal Direct Loans
Interest rate: 6.5 percent fixed
No dependents or spouse
This profile reflects a solid early-career salary but not a high-income professional, and the debt level is close to the national average for recent undergraduates.
This profile does NOT represent the most vulnerable borrowers who might be most adversely impacted by the policy change. In fact, we assume that both borrowers make all monthly payments on time.
Monthly Payments Under Different Plans
Using the program rules for the first year:
RAP: Payments equal 6 percent of AGI for this borrower’s income tier
Initial monthly payment: approximately 310 dollars
SAVE: Payments equal 5 percent of income above 225 percent of the federal poverty line. For a single borrower, this shields about the first 33,000 dollars of income
Initial monthly payment: approximately 116 dollars
Conventional fixed-payment plans:
10-year standard plan: approximately 396 dollars per month
20-year extended plan: approximately 261 dollars per month
Interestingly, the initial student loan payment under RAP is less than the payment for the 20-year loan for this borrower. This borrower might choose the 20-year term if he or she wants to minimize initial loan payments.
Lifetime Payments
Using the same assumptions—plus AGI growing at 2 percent per year—we find very different long-term outcomes:
Under RAP, payments rise modestly with income, and the borrower fully repays the loan in about 11.6 years, making total payments of roughly 51,351 dollars.
Under SAVE, payments stay below monthly interest for many years; they begin to reduce principal only around year 14. By the end of year 25, the borrower has paid about 56,825 dollars in total, reducing the principal by only 7,979 dollars and leaving roughly 27,020 dollars to be discharged under forgiveness rules.
These figures illustrate that SAVE minimizes monthly burdens and allows for eventual discharge of a substantial portion of the original debt, whereas RAP requires more aggressive repayment and a much earlier payoff.
The large discharge under SAVE represents a substantial taxpayer cost, since the government must absorb the unpaid principal that is forgiven after 25 years.
These estimates assume that the borrower makes all payments on time and in full and gets credited for the payments allowing for an on-time discharge.
In reality, many borrowers experience periods of hardship or income volatility and can’t make payments on time. Also, often loan services often do not accurately count all payments leading to delays in loan discharges.
Under RAP’s higher payments and reduced access to forbearance, such borrowers would be more likely to miss payments—losing protection against interest accrual and facing higher lifetime costs.
An analysis focused entirely on a typical borrower who presumably makes all payments will not measure risks for more vulnerable borrowers.
Therefore, focusing only on borrowers who always pay on time understates the hardship created by the policy shift.
Conclusion: Beyond a Single Case
This case study involves a comparison of outcomes from SAVE and RAP for a typical undergraduate borrower with a degree and $35,000 in debt. There really is a huge gap between outcomes from the Republican plan, RAP and the Democratic plan (SAVE).
The impact of the policy change will be different for many student borrowers with different degrees, debt loads, and career trajectories. Future analysis should examine a wide range of borrower profiles and career trajectories to more fully examine the ramifications of this policy change.
Authors Note: David Bernstein is the author of A Third Party Health Care Reform Plan, available at Amazon for $2.99.
https://www.amazon.com/dp/B0FMJ1YSKB?ref_=pe_93986420_775043100
He is working on the Third-party Student Debt Plan.
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