Student Loan Repayments Are Being Overhauled. What Borrowers Should Know.

Millions of student loan borrowers will soon need to choose a new repayment plan for their federal loans — otherwise, the government will make that choice for them.

The Biden-era repayment plan known as SAVE — short for Saving for a Valuable Education — is being officially dismantled. That means roughly seven million people enrolled in the program, the most affordable income-driven plan to date, will need to find a new option and restart payments. Their monthly bills have been on hold for nearly two years, ever since Republican attorneys general challenged the SAVE plan, thrusting borrowers into legal limbo.

Starting July 1, federal loan servicers will send notices to SAVE enrollees with deadlines on when they must take action. Borrowers will need to choose from a new menu of repayment options, as the Trump administration unveils major changes to the student loan system put in place by the big tax and policy bill that passed last summer.

But for some borrowers, a new and potentially higher monthly bill is arriving at a challenging moment, with inflation rebounding, utility bills and gas prices surging and, for some families, health care costs rising.

“There’s a lot of anxiety out there,” said Betsy Mayotte, president of The Institute of Student Loan Advisors, which provides advice to borrowers. “It’s not just about the student loan payments going up. It’s everything hitting at once.”

While SAVE borrowers need to act with the most urgency, other borrowers will be affected by the changes, too — two new repayment programs will be introduced, and several others will be phased out. Understanding the options can help people get a handle on their situation and come up with a plan.

What will happen next?

Servicers are expected to reach out to borrowers in SAVE — where payment levels are tied to earnings — on a staggered schedule throughout July with more information, including their deadline on when they must act.

If SAVE borrowers do nothing, their loans will be automatically placed in the existing standard repayment plan, which generally has fixed payments over 10 years and is likely to cost more than other options. (The term can be longer for consolidated loans.)

There is a caveat: If you take out new loans after July 1 (and do nothing with your old loans), the old loans will eventually be moved into a new tiered standard plan, where the loan term is based on the size of the balance; that plan replaces the old standard repayment plan and becomes available on July 1.

The takeaway: Be proactive and choose a plan that will work best over the long term.

What are SAVE borrowers’ options?

This depends.

Most borrowers will be weighing two options. If you don’t expect to take out any new federal loans (as in, ever), you will still have access to the existing income-driven repayment plan, known as Income-Based Repayment, or I.B.R. You’ll also be eligible for a new income-driven plan: the Repayment Assistance Plan, known as RAP, which becomes available on July 1.

I.B.R. requires borrowers to pay 10 percent of their discretionary income toward their balance for 20 years, after which any remaining balance is forgiven. (Discretionary income is defined as the amount earned above 150 percent of the federal poverty level, which is adjusted for household size.) That formula applies to borrowers with loans made on or after July 1, 2014. For loans taken before that, borrowers pay 15 percent of discretionary income over 25 years.

Most people will opt for I.B.R. or RAP. But some SAVE borrowers may do better, at least temporarily, by choosing either of two other options that currently exist but will be shuttered by July 2028: Pay as You Earn (PAYE) or the Income-Contingent Repayment (I.C.R.) plan. You would choose these only if the more permanent options (RAP or I.B.R.) cost more.

Borrowers with loans made before July 1, 2014, for example, are likely to have lower payments in PAYE than in the older version of I.B.R. They might as well get the benefit of lower payments for a couple of years before moving into a permanent plan.

If you expect to take out new federal loans on or after July 1, you will lose access to I.B.R. — even when it comes to paying your old loans. Your only two choices will be the new RAP program or the new tiered standard repayment plan, where the loan’s term is fixed, and based on the size of the balance.

How does the new RAP plan work?

The RAP plan is philosophically similar to previous income-driven repayment plans, like SAVE and I.B.R. Borrowers make payments that are tied to their income levels and household size — and after a set number of years, any remaining debt is forgiven (but taxable as income).

But RAP’s mechanics are different.

• RAP payments are graduated, ranging from 1 percent to 10 percent of the borrower’s adjusted gross income — the higher your income, the higher the percentage. (In contrast, I.B.R. shields a share of borrowers’ income from payments to cover basic expenses and calculates the payment on income above that amount.)

• RAP’s term is up to 30 years (at which point any remaining debt is wiped away). That’s five to 10 years longer than earlier income-driven plans.

• Borrowers can deduct $50 from their payment for each dependent claimed on their tax return, while I.B.R. has a broader and more generous adjustment for household members.

• RAP also requires people with extremely low or no income to make a token payment of $10 a month, whereas other income-driven plans don’t require any payment.

RAP has some beneficial features. If your monthly payment amount doesn’t cover the interest owed, the interest will be waived and erased. There’s also a guarantee that your loan’s principal — the amount you borrowed — will fall by up to $50 a month. If your payment chips away at only $20 of the principal, for example, the federal government kicks in an additional $30, experts said. These features were crafted so a borrower’s balance won’t grow over time.

But there’s a significant drawback that could make this plan more expensive over time: RAP is not indexed for inflation, so a borrower whose income merely kept pace with inflation could be bumped into higher payment tiers.

“For someone who has a modest income today, and whose paycheck just keeps up with inflation, they’d essentially see their monthly payment double over 20 years without really seeing a raise beyond inflation,” said Rich Williams, chief customer officer at Summer, a platform that provides guidance to student borrowers.

On top of that, even small pay raises could disproportionately increase payments because of the way the plan is structured. For example, a borrower with an adjusted gross income of $40,000 would pay 3 percent of that income each year, or $100 a month. But if the borrower earned just $1 more, he or she would owe 4 percent, or roughly $133 a month.

“It’s like a step effect,” said Mr. Williams, who was also a former deputy assistant secretary at the Department of Education. Payments in other income-driven plans, he added, rise on a more graceful curve as earnings increase over the years.

How can I figure out which plan works best for my situation?

The most efficient approach is to gather you loan documents and run the numbers through a calculator that can compare your monthly payment and total costs across different plans.

Borrowers with very low incomes — below 150 percent of the poverty line, for example — are likely to do better with the I.B.R. plans; they will qualify for $0 payments and will qualify for forgiveness sooner than in the RAP program.

But middle-income borrowers with manageable balances may do better in the RAP plan; they may be in a position to pay it off before 20 years.

Can I switch from the RAP plan into another repayment program?

Once you switch into RAP, switching out of it may carry a heavy cost. In the past, borrowers could move between income-driven repayment plans and their qualifying payments were transferable, counting toward forgiveness in all plans.

But RAP payments will not count as qualifying payments toward forgiveness if you move into another income-driven payment plan like I.B.R. (RAP payments do, however, count as a qualifying payment toward Public Service Loan Forgiveness.)

“It makes it a higher-stakes decision to enroll in RAP,” said Abby Shafroth, managing director of advocacy at the National Consumer Law Center. “If you’re enrolling in RAP, you should generally be doing so because you think it’s going to be the best plan for you long term, not just the best plan for you right now.”

I’m enrolled in Public Service Loan Forgiveness.

Public Service Loan Forgiveness, or P.S.L.F., is open to government and nonprofit employees like schoolteachers, public defenders and librarians. After they make 120 qualifying payments in an eligible repayment plan, any remaining balance is wiped out.

P.S.L.F. participants should find the plan with the lowest monthly payment. Since the program generally lasts for only roughly 10 years, experts said, borrowers don’t need to worry about total costs over the long term.

Payments made in the new RAP plan and in Income-Based Repayment both count as qualifying payments toward P.S.L.F. forgiveness. PAYE and Income-Contingent Repayment (I.C.R.) payments also count until those plans shutter in 2028. Payments made in the new tiered standard plan — which is open only to borrowers with new federal loans after July 1 — do not.

Does it make sense to consolidate?

Maybe not.

When you consolidate, you’re taking out a new loan to pay off your old ones, which can have consequences.

Borrowers who consolidate will lose any existing income-driven repayment credits toward forgiveness, a result of the court decision that vacated the rule that created the SAVE plan. “That’s a big risk that few people know about,” Ms. Shafroth said.

Those who consolidate after July 1 will be eligible for only the two new repayment plans — RAP and tiered standard — and lose access to existing ones, including I.B.R.

I’m enrolled in PAYE or I.C.R. What do I need to know?

You don’t need to act immediately, but you’ll need to figure out an alternative relatively soon — both the PAYE and Income-Contingent Repayment plans will be shuttered by July 1, 2028.

If you don’t expect to take out any new loans, you’ll maintain access to at least one existing income-driven plan, I.B.R.

PAYE plan enrollees who took out their loans on or after July 1, 2014, are likely to have similar payments on I.B.R., while many Income-Contingent Repayment enrollees would see their payments drop if they transferred into either I.B.R. program.

How are Parent PLUS borrowers affected?

Parents who take out any new federal loans after July 1 will be eligible only for the new tiered standard repayment plan. They will lose access to the safety net of income-driven programs — even for old loans.

Before the rules changed, parent PLUS borrowers had access to the most expensive income-driven plan, known as Income Contingent Repayment, which generally cost 20 percent of discretionary income with a term of 25 years and required loans to be consolidated.

That wasn’t a great option, but parents with existing PLUS loans will do better under the new rules as long as they have consolidated their loans before July 1 or have already enrolled in the Income-Contingent Repayment plan. That’s because they’ll now be eligible for the more affordable Income-Based Repayment plan. (But if you haven’t already started the consolidation process, that window has largely closed.)

After consolidating, borrowers aren’t done: They will need to make at least one payment under I.C.R., and then they can submit an application to the I.B.R. plan before the I.C.R. plan shuts down in July 2028.

Their I.B.R. payments will vary: Borrowers with loans taken on or after July 1, 2014, will pay 10 percent of their discretionary income over 20 years, whereas those with at least one loan taken out before July 1, 2014, will pay 15 percent over 25 years.

How long will it take to enroll in a new plan?

New requests are being handled within a couple of days, said Scott Buchanan, the executive director of the Student Loan Servicing Alliance, an industry group for loan servicers.

But that could change when more SAVE borrowers elect new plans as their summer deadlines approach. If you know that you want to move into an I.B.R. plan, you might as well do that now. RAP borrowers need to wait until July 1.

Borrowers who give the servicers permission to pull their tax returns are processed faster. If they need to submit alternative documentation — because their last tax return doesn’t reflect their current income — it can take eight to 10 days.

The servicers have a backlog of applications for income-driven repayment plans, but Mr. Buchanan said he didn’t expect that to slow them down.

What if I can’t afford to make any payments?

Find a plan that makes sense over the long run. But people who hit a rough patch — a job loss, for example — will still be able to pause their payments, though they’ll have fewer options. (The new law eliminates economic hardship and unemployment deferments for loans made on or after July 1, 2027.)

Borrowers in financial distress will generally need to turn to forbearance, which will let them stop payments for up to nine consecutive months. The idea is to steer cash-constrained borrowers into longer-term options like the RAP program.

Deferments remain for cancer treatment, military service and time spent attending school.

Where can I get more help?

The Federal Student Aid office has a loan simulator that helps compare plans; it should incorporate the new plans next month. The office’s website also has a page dedicated to recent changes.

The Institute of Student Loan Advisors (TISLA) provides free advice for borrowers (it also has a calculator).