What Experts Say Would Be the Perfect Income-Driven Repayment Plan

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The new federal student loan option available July 1 isn't most experts' idea of a perfect plan. But they don't agree on how they'd fix it.

The Repayment Assistance Plan (RAP) was created under last year's One Big Beautiful Bill Act. The income-driven repayment plan will be an added option for existing borrowers and will be the only income-driven repayment plan available to current college students.

Investopedia asked Meagan McGuire, a senior consultant at Student Loan Planner, and Preston Cooper, a senior fellow at the American Enterprise Institute, what their “perfect” income-driven repayment plan would look like. Here is what they said.

The Department of Education says RAP will simplify repayment and bring many of the 8.8 million borrowers in default back into repayment. Should the repayment plan fail to adequately support enough, more will default, with knock-on effects for consumer spending and the economy.

RAP calculates monthly payments differently, lowering them for some borrowers and raising them for others. The Department of Education will also waive interest for lower-income borrowers under RAP, ensuring their principal balance shrinks as they make payments.

Experts disagree about RAP's affordability. Some, like Cooper, support the plan, saying the interest waiver will help borrowers pay off their balances before they need forgiveness.

Student loan borrower advocates have argued RAP payments are less affordable for borrowers than previous plans, such as the now-defunct Saving on a Valuable Education repayment plan. McGuire agrees with Cooper that RAP's interest subsidy will help, but notes that RAP extends the time borrowers must make payments before receiving forgiveness from 20 to 25 years under existing plans to 30 years.

So what would their ideal plan look like? McGuire said her perfect income-driven plan would keep RAP's interest subsidy and shift some of the interest burden to colleges for borrowers who can't afford it.

She argues that would make colleges "more mindful" of accepting too many students and spur them to track better how their students are doing in the job market. "That would just give them more skin in the game," she said.

McGuire also said calculating payments at 10% of discretionary income—the formula used in Pay As You Earn and for newer Income-Based Repayment borrowers—would yield fairer monthly payments. Discretionary income is a borrower's income above 150% of the federal poverty line for their household size.

She would also eliminate using a spouse's income in calculating monthly payments. Borrowers who file jointly have their spouse's income included in income-driven repayment plans, increasing their payment amounts.

Cooper said RAP's tiered payment structure, which scales from 1% to 10% of income, would be included in a repayment plan he would design. He also backed RAP's family-size rule, which cuts monthly payments by $50 for each child the borrower claims as a tax dependent.

Existing income-driven plans use a broader definition that could include non-relatives the borrower supports, a standard the Government Accountability Office found difficult to verify and Cooper said "confused" borrowers. "This is much clearer because it aligns the definition of dependents with what's already used in the tax code," Cooper said.

McGuire said she thinks the 30-year forgiveness timeline in the RAP plan is too long, and her "perfect" plan would forgive debt after 20 or 25 years.

"Why the forgiveness options are so freeing is that you can make a payment that's a reasonable percentage of your income and not worry about if you're going to pay the loans off," McGuire said. "You can go towards that forgiveness timeline and then focus on other financial goals, like buying a house, getting married or saving for retirement."

In contrast, Cooper says his ideal repayment plan would have a 30-year forgiveness period and de-emphasize loan discharges.

"We don't want borrowers to be in the mindset of, 'Oh, I need to arrange my payments to try and get forgiveness in 20 years,'" Cooper said. "We want ... forgiveness as a last-ditch safety net in ... exceptional circumstances."

Borrowers struggling to afford their payments can request forbearance or deferment. However, many borrowers just need to move off standard payments to an income-driven plan, or transfer to another plan that better suits them, McGuire said.

"[Loan servicers] default to pausing the payment, which negatively affects their forgiveness timeline," McGuire said. "The standard should be [updating] the payment to make it more affordable first, and then go for deferment or forbearance if necessary."

McGuire also said applying for an income-driven plan should take five minutes or less, with the IRS sending income and tax data directly to servicers. She also said servicers should focus on processing applications quickly—in 2024 to 2025, applications stalled for months.

Cooper said borrowers who have missed one or two payments should be auto-enrolled in an income-driven plan. Since payments resumed after the pandemic, many student loan borrowers have had trouble affording payments, and delinquencies and defaults have risen significantly.

"If borrowers are struggling to make their payments, they might not know that [income-driven repayment plans] exist," Cooper said. Transferring then automatically "can really be helpful for those borrowers."

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