- Federal vs Private Student Loans and 529 Plans Explained
- Repayment Assistance Plan (RAP): How a Payment Is Applied (you are here)
This is part 2 of 2 of our guide to Student Loans and Paying for Education. It picks up where Federal vs Private Student Loans and 529 Plans Explained leaves off, and it is written to stand on its own: the key ideas are restated where you need them.
The statute fixes the order: each payment goes first to the month’s interest, then to fees, then to principal, and principal due but not paid is deferred rather than added to the balance (20 U.S.C. §1087e(q)). If an on-time payment does not cover the month’s interest, the shortfall is not charged. If it reduces principal by less than $50, the Secretary reduces principal by the lesser of $50 or the payment, minus whatever the payment already applied to principal. So an on-time RAP balance can never grow, and even a payment that covers no principal at all retires up to $50 of it.
Two details carry real money. Recertification: a borrower who does not supply income information when required is billed the 10-year standard payment on the balance when the loan entered repayment until the information arrives. Marriage: AGI includes a spouse’s income on a joint return; a married borrower who files separately is assessed on their own AGI only and counts only the dependents claimed on their own return.
Formula: monthly payment = (AGI × band rate) ÷ 12 − $50 × dependents, minimum $10.
The running household (1.6: Paychecks Decoded): AGI = $75,000 − $4,500 401(k) − $2,600 health premiums = $67,900, in the $60,001–$70,000 band, so 6% applies to all of it: $67,900 × 6% = $4,074 ÷ 12 = $339.50 a month.
A borrower with two dependents and AGI of $55,000: $55,000 × 5% = $2,750 ÷ 12 = $229.17 − 2 × $50 = $129.17. On a $40,000 balance at 6.52%, a month’s interest is $40,000 × 0.0652 ÷ 12 = $217.33. The payment covers $129.17 of it; the other $88.16 is waived, and because none of the payment reached principal, the government reduces principal by $50. The balance falls by $50 instead of rising by $88.16.
Bands are cliffs, not brackets: at AGI $60,000 the payment is $60,000 × 5% ÷ 12 = $250.00; at $60,001 it is $60,001 × 6% ÷ 12 = $300.01. For the household, an extra $7,900 a year of pre-tax 401(k) contributions would bring AGI to $60,000 and the payment to $250.00 — $89.50 a month less — while building retirement savings.
RAP is priced like a sliding-scale clinic with a ratchet on the door. What you pay depends on which income band you stand in, not on how much you owe, and every on-time month moves the balance toward the exit, by up to $50 even when the payment covers none of the interest. IBR works more like a tax on income above an allowance (150% of the poverty line), so its payment rises smoothly with income instead of in steps.
A borrower leaves school in 2026 with $30,000 of new Direct Loans at 6.52%. Because the balance is between $25,000 and $50,000, Tiered Standard sets a 15-year term: $30,000 × 0.0054333 ÷ [1 − 1.0054333−180] = $261.66 a month. RAP depends only on AGI. Illustrative assumption: AGI stays the same for the whole period (real incomes usually rise, which shortens RAP).
| Plan and income | Monthly payment | Months to finish | Total paid | Left to forgive |
|---|---|---|---|---|
| Tiered Standard, any income | $261.66 | 180 | $47,099.19 | $0 |
| RAP, AGI $45,000 (4%) | $150.00 | 360 | $54,000.00 | $9,184.59, taxable |
| RAP, AGI $60,000 (5%) | $250.00 | 195 | $48,700.31 | $0 |
| RAP, AGI $67,900 (6%), the running household | $339.50 | 121 | $40,985.66 | $0 |
The flip point is a cliff, not a crossover. RAP’s payment is below Tiered Standard’s at any AGI up to $60,000 ($250.00 at $60,000) and above it from $60,001 ($300.01), because the rate jumps from 5% to 6% of all income. Below the cliff, RAP buys a lower payment at the price of more total interest, since the payment sits close to the month’s interest ($163.00 at the start). At AGI $45,000 the payment falls short of interest for the first 48 months, the $50 principal match carries the balance down, and $9,184.59 remains after 360 payments: forgiven, but taxed as income in that year under current law. Above the cliff, RAP’s larger payment simply clears the loan faster and cheaper. PSLF overrides all of this: on RAP, 120 qualifying payments end the debt tax-free; on Tiered Standard, none count (4.3).
Public Service Loan Forgiveness itself has not been eliminated — despite widespread confusion in 2026, Congress did not repeal it, and the core 120-qualifying-payments, 10-year structure for full-time work at a qualifying government or 501(c)(3) nonprofit employer is unchanged. What changed is which repayment plans earn PSLF credit: as of this writing, only the 10-year Standard Plan, IBR, and RAP count with no end date; PAYE and ICR still count, but only through June 30, 2028; and the new Tiered Standard Plan — the automatic default for anyone who doesn’t actively choose a plan — earns zero PSLF credit, even in its 10-year tier, because it is not on the statute’s list of qualifying plans (ED’s May 1, 2026, final rule confirms this). Payments already made under SAVE still count toward the 120; months spent in the SAVE-litigation forbearance do not. Separately, the Department of Education’s October 31, 2025, final rule that would have narrowed which employers qualify for PSLF was vacated in full on June 30, 2026, one day before it was due to take effect, by federal district courts in Massachusetts and the District of Columbia. The Department filed appeals in both cases (to the First and D.C. Circuits) on August 27, 2026; the vacatur stays in place while they proceed, so the traditional, broader employer-eligibility rules remain in force for now (as of October 4, 2026).
Anyone pursuing PSLF with a loan disbursed on or after July 1, 2026, must actively enroll in RAP — the Tiered Standard default earns no credit at all, silently, unless a plan is chosen deliberately. Submitting the PSLF employment certification form annually, rather than waiting until the full 120 payments are believed complete, catches problems like this years before they become an unpleasant surprise at the finish line.
A 529 plan is a state-sponsored investment account for education expenses: contributions aren’t federally deductible, but growth is tax-deferred and withdrawals for qualified expenses are entirely federal-income-tax-free — many states add their own deduction for contributions on top. OBBBA meaningfully expanded what counts as “qualified” for distributions after July 4, 2025 (with the higher K-12 cap starting in 2026):
- K-12 annual withdrawal cap doubled from $10,000 to $20,000 per beneficiary, effective for tax year 2026.
- Qualified K-12 expenses expanded, for withdrawals after July 4, 2025, to include curriculum materials and textbooks, tutoring from an unrelated qualified tutor, and fees for standardized tests, AP exams, and college admissions exams — not just tuition.
- Postsecondary credentialing programs — trade certifications, apprenticeships, and similar non-degree credentials — now qualify alongside traditional college expenses.
- A 529-to-Roth IRA rollover (added by SECURE 2.0, enacted in December 2022, for distributions made from 2024; unchanged for 2026) lets leftover 529 money move by direct trustee-to-trustee transfer into the beneficiary’s own Roth IRA: up to $35,000 over their lifetime, and no more in any year than the Roth IRA contribution limit ($7,500 for 2026) less any other IRA contributions that year. The 529 account must have been open more than 15 years, and contributions made in the last five years, with their earnings, cannot be moved — a real answer to “what if my child doesn’t need it all.”
$200 contributed monthly from birth through age 18 (216 months), growing at an assumed 6% average annual return, compounds to ≈$77,470 — of which only $43,200 was actually contributed. The remaining ≈$34,270 is tax-free growth, entirely untaxed at withdrawal provided it’s used for a qualified expense under the expanded 2026 rules above.
These situations change the answers in 4.1–4.4.
| Situation | What changes | Why | Number or rule |
|---|---|---|---|
| Married, filing separately | RAP counts only your AGI and the dependents on your own return | The statute excludes a spouse’s AGI for separate filers | Separate filers lose the student loan interest deduction and the AOTC and Lifetime Learning Credit (IRS Pub 970); run both returns |
| Missed income recertification | The payment resets to the 10-year standard amount | The statute’s default for missing income data | Based on the balance when the loan entered repayment, until you supply the information |
| Forgiveness after 360 RAP payments | The forgiven balance is federal taxable income | The 2021–2025 exclusion for all student loan discharges ended; 26 U.S.C. §108(f)(5) now covers death and disability | PSLF stays tax-free under §108(f)(1); budget for the tax in year 30 |
| Death or total and permanent disability | Federal loans are discharged, without federal income tax | OBBBA made the death and disability exclusion permanent | The taxpayer’s Social Security number must be on the return |
| Payments stop | Default, then involuntary collection | Default is defined by days delinquent; garnishment needs no court order | Default at 270 days (34 CFR 685.102); garnishment up to 15% of disposable pay after 30 days’ notice (20 U.S.C. §1095a) |
| Cosigned private loan; the student dies | The cosigner must be released | A 2018 amendment to the Truth in Lending Act | Loans agreed on or after Nov 20, 2018 (15 U.S.C. §1650(g)); older loans follow the contract |
| 529 owned by a grandparent | Not reported on the FAFSA | Only parent and student assets are reported; a parent-owned 529 for a dependent student counts as a parent asset | A parent asset reduces aid by at most 12% × 47% = 5.64% of its value (see 4.6) |
| 529 money not used for education | Earnings are taxed plus a 10% additional tax | Tax-free growth is conditional on qualified use | $10,000 out with 40% earnings, 22% bracket: $4,000 × (22% + 10%) = $1,280. No 10% on amounts matching a tax-free scholarship, or after death or disability; up to $10,000 lifetime can repay student loans; a change of beneficiary to a family member is tax-free |
The expanded federal rules don’t automatically apply at the state level — about a dozen states do not treat even K-12 tuition as qualified (13 on Saving for College’s January 2026 list), and many have yet to adopt OBBBA’s broader K-12 and credentialing rules, meaning a withdrawal that’s entirely federal-tax-free can still trigger state income tax or clawback of a prior state deduction. Confirming a specific state’s conformity before relying on any of the newly expanded uses is worth the five minutes it takes.
Borrowing: take federal Direct Loans before any private loan, and keep total borrowing at or below the first-year salary you can expect in your field; at 6.52%, a 10-year payment on a balance equal to salary is about 13.6% of gross pay. Repaying a loan first disbursed on or after July 1, 2026: if you work, or expect to work, for a government or 501(c)(3) employer, enroll in RAP. Otherwise compute your RAP payment (AGI × band rate ÷ 12 − $50 × dependents) and compare it with the Tiered Standard payment: take the lower one if your emergency fund is under three months of expenses, and the one that clears the loan sooner if it is full. Recertify income every year.
Assumptions: stable or rising income and current law. Ignore the comparison when your AGI sits just above a band edge (a pre-tax 401(k) contribution may drop you below it, 4.3) or when a marriage, divorce or child is about to change your AGI or dependents; recompute then.
Letting a federal loan default when RAP would have cost almost nothing. Take a single borrower earning $30,000 with AGI of $30,000 and no dependents. On RAP the payment is $30,000 × 2% ÷ 12 = $50.00 a month. In default, once garnishment is active, the government may take up to 15% of disposable pay. Illustratively, with no state tax: $30,000 − $1,420 federal income tax − $2,295 Social Security and Medicare = $26,285; × 15% = $3,942.75 a year, or $328.56 a month. That is $278.56 a month, $3,342.75 a year, more than RAP, before any tax refund is seized, and the default is reported to the credit bureaus.
How to avoid it: the month a payment becomes hard, ask your servicer to move you to RAP (or IBR on loans made before July 1, 2026) and set up autopay. A plan change resets the payment to what your income supports; forbearance only postpones it.
What happens if I stop paying my federal student loans?
A Direct Loan goes into default after 270 days without payment. The government can then garnish up to 15% of disposable pay without a court order, after 30 days’ written notice, and can take tax refunds through the Treasury Offset Program; the default is reported to credit bureaus. The safer move is to enroll in RAP before any of this starts.
Is student loan forgiveness taxable in 2026?
It depends on the kind. PSLF forgiveness is not federal taxable income, and neither is a discharge for death or total and permanent disability, an exclusion the 2025 law made permanent. Forgiveness at the end of an income-driven plan, such as RAP after 360 payments, is taxable again, because the temporary exclusion covering discharges from 2021 through 2025 has ended. Some states tax forgiveness differently from the federal rules.
Does getting married change my student loan payment?
Under RAP it can. On a joint return, RAP uses the couple’s combined AGI, which can push you into a higher band. A married borrower who files separately is assessed on their own AGI only, but separate filers give up the student loan interest deduction and the education credits. Compare the lower loan payment against the higher tax bill before choosing.
What is the difference between subsidized and unsubsidized loans?
Who pays the interest while you are in school. On a subsidized loan, for undergraduates with financial need, the government pays it during enrollment and the grace period. On an unsubsidized loan it accrues from the day the money is paid out: $2,000 at 6.52% accrues $586.80 over four years of school and six months of grace. Both carry the same rate.
What happens to a 529 plan if my child does not go to college?
You have several tax-free options before a penalty applies. Change the beneficiary to another family member, use it for trade credentials or apprenticeship costs, repay up to $10,000 of student loans, or roll up to $35,000 into the beneficiary’s Roth IRA if the rules in 4.4 are met. Otherwise the earnings portion of a withdrawal is taxed plus a 10% additional tax, waived up to the amount of any tax-free scholarship.
Federal student loans beat private ones less on rate than on protections: income-driven repayment, PSLF, deferment and forbearance, and discharge on death or total and permanent disability. For a loan first disbursed on or after July 1, 2026, only two plans remain, the Tiered Standard Plan and the Repayment Assistance Plan (RAP), which charges 1% to 10% of your whole AGI by $10,000 bands, less $50 a month per dependent, and never lets an on-time balance grow. If you are pursuing PSLF on a new loan, enroll in RAP deliberately, because the Tiered Standard default earns no credit. To save ahead, a 529 plan grows tax-deferred and pays out federal-tax-free for qualified expenses, now including up to $20,000 a year of K-12 costs, but check that your state has conformed before relying on the new uses.
Five questions on this chapter. Decide on your answer first, then click “Reveal Answer.”
1. A borrower with one dependent repays under RAP, and her most recent tax return shows AGI of $85,000. What is her monthly payment?
- $216.67
- $516.67
- $587.50
- $566.67
Reveal Answer
Answer: B. AGI of $80,001–$90,000 is the 8% band, applied to all of it: $85,000 × 8% ÷ 12 = $566.67, minus $50 for the dependent = $516.67. Bands are cliffs, not brackets ($216.67 taxes each band separately). (Part 4.3)
2. A nurse at a 501(c)(3) hospital takes her first Direct Loan in August 2026 and never chooses a repayment plan. After 24 on-time payments, how many count toward PSLF?
- All 24, since any on-time payment from a qualifying employee counts
- All 24, provided she certifies her employment when she reaches 120
- None, since the default Tiered Standard plan does not qualify
- The payments that fall within Tiered Standard’s 10-year tier
Reveal Answer
Answer: C. A borrower who does not choose lands on Tiered Standard, which is not on the statute’s list of PSLF plans, even in its 10-year tier. She must actively enroll in RAP; annual employment certification would have caught this early. (Part 4.3)
3. In 2026 a family withdraws 529 money for a high-schooler: $15,000 of private-school tuition, $3,000 for an unrelated qualified tutor and $200 of SAT fees. Federally, how much can be a qualified withdrawal?
- All $18,200, within the new $20,000 K-12 cap
- $10,000, the K-12 annual cap, for tuition
- Nothing, since 529 money is for college costs
- $15,000, since K-12 withdrawals cover tuition
Reveal Answer
Answer: A. OBBBA doubled the K-12 cap to $20,000 for 2026 and added tutoring from an unrelated qualified tutor and standardized-test fees to tuition. The $10,000 cap and tuition-only rule are the old law; state conformity still needs checking. (Part 4.4)
4. A single borrower with $30,000 of Direct Loans first disbursed after July 1, 2026, at 6.52% can pay $261.66 a month on the Tiered Standard plan. Her AGI is $60,500 and she has no dependents. Which plan has the lower monthly payment?
- RAP, at $250.00, because only the income above $60,000 is charged 6%
- Tiered Standard, because RAP would charge $302.50
- RAP, at $252.08, because 5% applies to income up to $60,000
- Both are $261.66, because RAP is capped at the standard payment
Reveal Answer
Answer: B. RAP bands are cliffs: AGI above $60,000 puts all income at 6%, so $60,500 × 6% ÷ 12 = $302.50, which is more than the $261.66 Tiered Standard payment. (Part 4.3)
5. Worked problem: A family saves $200 a month for 18 years in a 529 earning 6% a year (monthly compounding). What does it grow to?
Reveal Answer
Answer: FV = $200 × [(1.005)216 − 1] ÷ 0.005 = $77,471.
- Next steps for borrowers enrolled in SAVE — End of SAVE
- FY27 sequester-required changes — Origination fees
- Federal student loan program final regulations, May 1, 2026 — RAP, Tiered Standard and PSLF plan rules
- Interest rates for loans first disbursed July 1, 2026–June 30, 2027 — 2026–27 Direct and PLUS rates
- Repayment plans — Plan menu
- Student loan interest rate reduction — Autopay reduction