Late payments can strip RAP student loan borrowers of key subsidies

Federal student loan borrowers entering the new Repayment Assistance Plan can lose several cost-saving features if a monthly bill is paid even one day after its due date, according to higher education experts cited by CNBC. The rule affects access to monthly interest relief, a potential principal reduction match and credit toward loan forgiveness, making payment timing central to the economics of the plan.

The Repayment Assistance Plan, known as RAP, is the Education Department’s latest income-driven repayment program. It became available on July 1 and generally sets monthly bills between 1% and 10% of a borrower’s earnings, with higher-income borrowers facing larger required payments. The plan provides for loan forgiveness after 30 years.

Nicholas Kent, a senior Education Department official, wrote on X at the start of the month that nearly 46,000 borrowers had already applied to enroll in RAP.

Benefits depend on meeting the due date

Mark Kantrowitz, a higher education expert, told CNBC that a borrower who is late by even a single day under RAP will give up benefits that reduce loan costs. He said other repayment plans allow more tolerance before a payment is treated as late, making RAP unusual in how quickly penalties apply.

Rich Williams, a former deputy assistant secretary at the Education Department, told CNBC that RAP was designed in part to address a common problem in student lending: balances rising above the amount originally borrowed because interest continues to accrue. Williams, now chief customer officer at Summer, a company that guides loan holders, said that protection comes through two features tied to on-time payment.

The first feature is an interest waiver. If a borrower’s monthly payment does not cover all interest that accrued during the month, the Education Department removes the unpaid interest, according to Williams. That mechanism can prevent the balance from growing when the required income-based payment is too small to cover monthly interest charges.

The second feature is a principal match. If an on-time payment reduces the loan’s principal by less than $50, the department may contribute as much as $50 to help lower the outstanding principal, according to Williams and RAP terms referenced by Massachusetts state guidance. Williams said that design is intended to ensure the borrower’s principal balance declines each month regardless of payment size.

Both the interest waiver and the principal match are forfeited when the borrower misses the due date, CNBC reported, citing the plan’s rules and the experts.

Forgiveness credit can also be affected

A late RAP payment also does not count toward forgiveness under the plan, CNBC reported. It also does not count toward Public Service Loan Forgiveness, the federal program that cancels remaining debt for eligible public-sector and nonprofit workers after 120 qualifying payments.

One benefit remains available for the month even if a borrower pays late: RAP’s $50 reduction in the monthly bill for each dependent listed on the borrower’s federal tax return. Dependents are often children, but can include parents and others in certain circumstances.

Williams told CNBC that borrowers seeking to avoid missed deadlines can use automatic payments. The Education Department is offering a 1 percentage point interest-rate reduction through June 30, 2028, for borrowers who enroll in autopay with their servicer by the end of September, according to CNBC.

Autopay carries operational risks that borrowers should monitor, CNBC noted, including cases in which loan holders have reported incorrect withdrawal amounts. Williams also said borrowers whose income falls should notify their loan servicer so the required payment can be recalculated.

Williams added that paying more than the required amount in a month can place an account in “pay ahead” status, which may make the borrower ineligible for RAP’s interest waiver and principal match. He told CNBC that paying the precise amount due on time is generally the safest way to preserve the plan’s benefits.

This story draws on original reporting from CNBC.