There’s been talk recently of creating a 50-year home mortgage because the cost of a home has become unreachable for most. The assumed thought process is that by stretching out the payments an extra 20 years, unaffordable monthly mortgage payments will be achievable. Critics counter that this new idea will not only make true home ownership all but impossible (i.e. paying off the home) but will also make the cost of the home loan skyrocket, due to 240 extra months of payments with interest.
The same could be said for student loan debt, which can be at times as much as or more than a home mortgage. Income driven repayment plans were created to adjust your payment based on your income, which typically lengthens the loan term, to make the payment affordable. Additionally, after paying for a prescribed number of years any unpaid balance for the loan may be forgiven. While attractive at first, it’s important to note, these types of plans end up costing you more in the long run.
Unfortunately, due to the high cost of living, many student loan borrowers find themselves with no other option than to look to income driven repayment plans for relief. This year borrowers with loans disbursed on or after July 1, 2026 will have 2 new (and only these 2) options for repayment and both can be costly.
New Student Loan Repayment Options Start This Year
With the passage of the One Big Beautiful Bill this past summer came changes to student loan repayment. Existing programs are being phased out or changed and what will remain for new borrowers after July 1, 2026 will be two choices: a standard repayment plan with a term length determined based on the outstanding principal loan amount or an income based Repayment Assistance Plan (RAP) with payments based on the borrowers income. One plan considers how much money was borrowed, the other plan considers the borrowers income, but neither considers both and both play an important role in the borrower’s ability to repay.
Note: Borrowers already in repayment prior to July 1, 2026 can remain in their plans as previously set through June 30, 2028.
1 - Updates to the Standard Repayment Plan
Currently the Standard Repayment Plan is a fixed payment, 10-year plan (up to 30 years for consolidated loans). Borrowers are defaulted into this plan if no other plan has been selected. Under this plan payments are set based on the one standard term length, regardless of income or loan amount – all loans in this plan are repaid in 10-years.
After July 1, 2026 the Standard Repayment Plan will be modified to take into account outstanding principal loan amount. The term length of the loan will be adjusted based on the amount owed. A borrower with a $50,000 loan will have a 20-year term while a borrower with a $15,000 loan will only have 10 years. Borrowers owing over $100,000 will have a 25-year term.
While this spreads the cost of the loan out over a longer period, making the monthly payment lower than it might have been with a 10-year term, it also adds to the total cost. Paying off your loan as early as possible is the best way to reduce the overall cost of the loan.
2 - The New Repayment Assistance Plan – RAP
Income based repayment programs are meant to help adjust your monthly payment to something that’s affordable given your level of income. The federal government has had many different types of income driven repayment plans over the years. The current plans are being phased out to give way for a new plan called RAP (Repayment Assistance Plan).
RAP uses your income to determine your monthly payment. Payments can range anywhere between 1-10% of your adjusted gross income. The minimum payment anyone would ever pay is $10 and after 360 on-time payments (30 years) any remaining balance is cancelled.
With RAP the more you make the more you pay. Borrowers with no dependents and an AGI of $50,000 will pay $167 a month, while similar borrowers who make $100,000 will pay $750.
If a dependent undergraduate student borrowed $31,000 (the maximum loan limit) and repaid the loan using the updated standard plan with a term of 15-years, monthly payments would be $245 at 5% interest (for example), and the total cost of the loan would be $44,000. If that same borrower had an AGI of $50,000 the monthly payments would be $167.
After 15 years, $30,060 in payments will have been made. While RAP waives unpaid interest and ensures the principal is reduced each month by up to $50 (meaning the principal only ever goes does down), the plan is designed with a 30-year loan term and borrowers who remain on the plan for the full term could end up paying as much as $60,120. That total cost is just about twice the amount borrowed.
The High Cost of Borrowing and Ways to Save Money
Regardless which plan you choose, the cost of borrowing is always more the longer you take to pay it back. Lenders are quite willing to allow to take longer in repayment, knowing their patience will pay.
The original standard plan would have had the borrower pay of the $31,000 loan in 10 years. At the same interest the monthly payment would be $329. That borrower’s total cost is about $4,500 less and be paid off 5 years sooner versus the updated standard plan.
While a low monthly payment might be necessary for a time, if you can, when you can, pay as much as you can to reduce your principal amount and pay off your loan sooner. The extra dollars today could amount to thousands saved over time.
Some ways to save on your loan include:
- Setting up automatic payments. Check with your loan servicer but many will offer a 0.25% interest rate reduction for enrolling in automatic payments.
- Make half-payments bi-weekly (2x a month). Each time you make a payment it helps to reduce your principal. Your interest paid is tied to your principal amount, so anything you can do to lower your principal ultimately will lower the cost of your loan.
- Pay more than the minimum payment. Anything you can pay above and beyond the minimum payment will help reduce your principal, help you pay the loan off sooner and lower the total interest cost.
- Don’t miss any payments. Your loan servicer may charge fees for late payments. Those fees will work against your efforts to pay down your loan. If you find yourself struggling to make the minimum payment, contact your loan servicer ASAP to find a solution.
