The U.S. Department of Education is introducing a new Repayment Assistance Plan (RAP) starting July 1, which allows federal student loan borrowers to lower their monthly payments based on a percentage of their income. As borrowers’ incomes rise, so do payments, but they have strategies to reduce their monthly bills.
Key Points:
-
RAP Overview:
- Payments range from 1% to 10% of adjusted gross income (AGI), with a minimum payment of $10.
- Unlike other income-driven plans, RAP does not account for necessary expenses in its calculation.
-
Income Reduction Strategies:
- Contributing to pre-tax retirement accounts like a 401(k) or traditional IRA can lower AGI and, consequently, monthly payments.
- Other options include pre-tax contributions to Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs).
- Self-employed borrowers should claim legitimate business expenses to reduce AGI.
-
Dependent Deductions:
- Borrowers can receive a $50 reduction in their monthly payments for each dependent claimed on their tax return.
-
Long-Term Perspective:
- Although RAP may lower monthly payments, borrowers could end up paying more over time since loan forgiveness comes only after 30 years, compared to 20 or 25 years under other plans.
- Comparing Plans:
- Existing borrowers still have access to current income-driven repayment plans, which might offer better terms than RAP.
Borrowers are encouraged to plan strategically to maximize their benefits under RAP, especially with the impending changes in repayment options.
