Student Loan Calculator: Student Loan Repayment on Two Tracks, RAP vs Standard

2026 Student Loan Changes

• Two Repayment Plans:
  Standard (10-25 years) and Repayment Assistance Plan (RAP), an income-driven plan
• Grad PLUS Elimination:
  Grad PLUS loans are eliminated for new borrowers as of July 1, 2026
• Borrowing Caps:
  Graduate students: $20,500/year unsubsidized. Professional degrees: $50,000/year
• Taxable Forgiveness:
  Loan forgiveness after January 1, 2026, is considered taxable income at the federal level
• Interest Subsidy:
  Under RAP, unpaid monthly interest is waived if minimum payment is met, preventing balance growth

These changes apply to new loans taken out after July 1, 2026. Existing borrowers may be grandfathered into previous plans.

• Standard plan example:
  $40,000 at 5.5% for 10 years: r = 0.055/12 ≈ 0.00458, n = 120 payments. Monthly payment ≈ $434. Total paid ≈ $52,100; total interest ≈ $12,100.
• RAP example:
  AGI $50,000, 5% rate, 2 dependents: ($50,000 × 0.05 / 12) − (2 × $50) = $208 − $100 = $108/month. If monthly interest is $183, the government subsidizes $75/month in unpaid interest.

Interest Subsidy and Balance Protection

• Interest Waiver:
  If your RAP payment is less than your monthly interest, the unpaid interest is waived
• Balance Protection:
  This prevents your loan balance from growing, unlike previous income-driven plans
• Example:
  If your payment is $10 but interest is $200, the government pays $190/month in interest subsidy
• Benefit:
  Your balance stays stable or decreases, even with low payments

This interest subsidy is a significant improvement over previous income-driven plans where unpaid interest was capitalized, causing balances to balloon.

Standard Plan Terms and Calculation

• Term Length:
  10 to 25 years, depending on loan balance
• Extended Term:
  Loans over $25,000 can extend up to 25 years
• Payment Formula:
  Payment = P × [r(1 + r)^n] / [(1 + r)^n - 1]

  where P = principal, r = monthly rate, n = number of payments
• Advantage:
  Fixed payments, predictable payoff date, no forgiveness tax
• Disadvantage:
  Higher monthly payments than income-driven plans

The Standard plan is best for borrowers who can afford higher payments and want to pay off their loans faster without relying on forgiveness.

Taxable Forgiveness Returns

• Taxable Date:
  Forgiveness granted after January 1, 2026, is taxable
• Tax Calculation:
  Tax Liability = Forgiven Amount × Marginal Tax Rate
• Example:
  $50,000 forgiven at 22% tax rate = $11,000 in taxes
• Planning:
  Set aside funds for the tax bill, or consider paying off loans before forgiveness to avoid taxes
• Impact:
  The "tax bomb" significantly reduces the benefit of forgiveness for many borrowers

This is a major change from the temporary tax-free forgiveness period. Plan ahead for the tax liability on any forgiven amount.

New Borrowing Caps

• Graduate Students:
  $20,500/year in unsubsidized Direct Loans (down from unlimited Grad PLUS)
• Professional Degrees:
  $50,000/year for medical, law, and other professional programs
• Undergraduate Rates:
  2025-2026 fixed rate: 6.39% for Direct Subsidized and Unsubsidized Loans
• Impact:
  Students may need to rely more on private loans or reduce borrowing

These caps apply only to new loans taken out after July 1, 2026. Existing borrowers are not affected.