Student Loan Borrowers Can Cut RAP Bills by $64 a Month as SAVE Exit Nears

Q: What simple tax move can slash your new student loan payment, saving you thousands annually?

The simplest move is to lower your adjusted gross income, or AGI, by putting more money into pretax accounts such as a traditional 401(k), HSA, FSA, or deductible traditional IRA. That matters because the new Repayment Assistance Plan, or RAP, sets monthly student loan bills directly from AGI. Unlike older income-driven plans, RAP does not exclude a chunk of income for basic living costs, so even a modest drop in AGI can cut payments noticeably. Financial advisers cited in the reporting say this can save borrowers hundreds or even thousands of dollars a year, especially if income falls near a RAP threshold where a small AGI change produces a much lower bill. For most workers, the easiest tactic is increasing payroll deductions into a pretax 401(k) or similar workplace retirement plan. HSA and FSA contributions also reduce taxable income and therefore the income used to calculate RAP payments. Roth contributions do not help because they are made with after-tax dollars. Other above-the-line deductions can help as well, including deductible traditional IRA contributions and up to $2,500 in student loan interest. Self-employed borrowers may have even more room to lower AGI through legitimate business deductions, retirement contributions, and health insurance write-offs. The key point is simple: if you can legally reduce AGI on your tax return, you can often reduce your RAP payment too.

3 articles · Updated · CNBC · Jun 13

$1,001 in extra pretax retirement contributions could cut a borrower's RAP payment to $350 from $414 a month by lowering adjusted gross income below a threshold.
RAP starts July 1 and generally charges 1% to 10% of earnings, with a $10 minimum payment and no $0-payment option for very low-income borrowers.
That makes tax planning more valuable for millions leaving the SAVE plan within about 90 days of July 1 after a federal appeals court ended it earlier this year.
Borrowers can also reduce RAP bills through pretax HSA or FSA contributions, self-employment deductions, and a $50 monthly reduction for each dependent claimed on tax returns.
RAP can lower monthly bills but may raise lifetime costs because forgiveness comes after 30 years; existing borrowers may still compare it with IBR and other legacy plans.