US Department of Education's New Student Loan Plan Penalizes Late Payments

The U.S. Department of Education's new Repayment Assistance Plan, or RAP, offers certain benefits to student loan borrowers — but only if their bill is paid on time.

"Being late with a payment, by even just one day under the RAP repayment plan, will cost you," said higher education expert Mark Kantrowitz. "You will lose valuable benefits that save you money."

RAP is the government's latest income-driven repayment plan, meaning its bills are capped at a share of your income. Under the plan, which became available July 1, monthly payments will typically range from 1% to 10% of a borrower's earnings; the more they make, the bigger their required payment. RAP culminates in loan forgiveness after 30 years.

Nearly 46,000 student loan borrowers have already submitted an application to enroll in RAP, Nicholas Kent, a top official at the Education Department, wrote on X at the start of the month.

Here's what to know about the importance of timely payments on RAP.

Benefits lost by late payments

Student loan borrowers often see their balances soar above the amount they originally took out, due to interest accrual, said Rich Williams, a former deputy assistant secretary at the Education Department. RAP was designed to shield borrowers from that problem, Williams said.

"That protection comes from two benefits, both tied to paying on time," he said.

The first perk is an interest waiver, in which the department will erase any interest that accrued on your balance that month that is not covered by your payment. The second: If your on-time payment reduces your principal balance by less than $50, the department may contribute up to $50 in a match, "ensuring your principal drops every month, regardless of your payment size," said Williams, who is also the chief customer officer at Summer, a company that provides guidance to loan holders.

Both those benefits are lost if you miss your due date.

A late payment will not count toward loan forgiveness, either under the terms of RAP or for Public Service Loan Forgiveness. PSLF leads to debt cancellation for public servants after 120 payments.

RAP is unique in how quickly these consequences take effect, Kantrowitz added.

"The other plans have a tolerance before a payment is considered late," he said.

Even if your payment is late, you'll retain access to the plan's $50 per-dependent discount for that month. Under RAP's terms, you get that reduction in your monthly bill for each dependent listed on your federal tax return, which often are children but can also include parents and others in certain cases.

How to make sure you pay on time

The best way to avoid missing your due date is to sign up for automatic payments, Williams said. The Education Department has added an incentive for borrowers to do just that: a 1-percentage-point reduction in their interest rate through June 30, 2028. But to benefit, borrowers need to enroll in autopay with their student loan servicer by the end of September.

One note of caution: Some loan holders have found the wrong amount taken from their accounts with autopay. As a result, keep an eye on the monthly charges.

If your income drops, you should alert your loan servicer, "so your payment adjusts to something you can afford, rather than risking a missed payment," Williams said.

Your account can also flip to a "pay ahead" status if you send in more than you owe one month, which may disqualify you from both RAP's interest waiver and the matching principal payment, Williams said.

"So, paying exactly what you owe, on time, is usually the smartest move," he said.