What is the RAP interest subsidy?

The RAP interest subsidy is a federal benefit that covers any accrued interest your monthly payment does not pay off. If your RAP payment is less than the interest that accrues on your loans each month, the government forgives the unpaid interest instead of adding it to your principal balance. This prevents negative amortization — the situation where your loan balance grows even though you are making payments.

How does the RAP principal match work?

Under RAP, if your monthly payment reduces your principal by less than $50, the federal government contributes the difference — up to $50 per month — as an additional principal reduction. For example, if your payment reduces principal by $20, the government adds $30 so that at least $50 of principal is paid down that month. This accelerates repayment for low-income borrowers.

Does the interest subsidy apply to all loan types?

The interest subsidy applies to all eligible Direct Loans enrolled in the RAP plan, including Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct Consolidation Loans. FFEL and Perkins loans must be consolidated into a Direct Consolidation Loan first. Parent PLUS Loans are not eligible for RAP or its interest subsidy.

How is the RAP interest subsidy different from the SAVE plan subsidy?

Both RAP and the now-ended SAVE plan offer interest subsidies that prevent balance growth. Under SAVE, the subsidy covered 100% of unpaid interest on all loan types. RAP provides the same full coverage — any interest your payment does not cover is waived — but RAP adds a unique $50/month principal match that SAVE did not offer. RAP also uses a different payment formula based on fixed income brackets rather than discretionary income.

Can my loan balance still grow under RAP?

No. Because the RAP interest subsidy covers any unpaid interest each month, your balance cannot increase due to accruing interest. In fact, with the additional $50/month principal match, most borrowers will see their balance decrease over time, even if their monthly payment is very low.

Is the interest that is subsidized considered taxable income?

Under current IRS guidance, interest that is waived through the RAP subsidy is generally not treated as taxable income to the borrower at the time it is waived. However, if your remaining balance is forgiven at the end of the 30-year repayment period, the forgiven amount may be taxable. Consult a tax professional for advice specific to your situation.

Does the principal match have a maximum amount?

Yes. The principal match is capped at $50 per month. If your payment already reduces your principal by $50 or more, no additional match is provided. The match is designed to help borrowers whose low payments barely (or do not) reduce principal.

What happens to the interest subsidy if my income increases?

As your income increases, your RAP payment rises according to the income bracket schedule (1% to 10% of AGI). Higher payments cover more — or all — of the monthly interest, so less subsidy is needed. If your payment exceeds the monthly interest, the subsidy is $0 and the excess goes toward principal. The subsidy adjusts automatically each year when you recertify your income.

RAP Interest Subsidy: How It Prevents Your Balance from Growing

One of RAP's most powerful features is its interest subsidy. If your monthly payment doesn't cover all the interest on your loans, the government waives the rest — so your balance never grows. Combined with a $50/month principal match, RAP actively shrinks your debt.

How the RAP Interest Subsidy Works

Under most income-driven repayment plans, if your monthly payment is lower than the interest that accrues, the unpaid interest is capitalized — added to your principal — causing your balance to grow over time. This is called negative amortization, and it can leave borrowers owing far more than they originally borrowed.

RAP eliminates this problem. Under the Repayment Assistance Plan, any interest your payment does not cover is waived by the federal government. The unpaid interest is not added to your principal, not deferred, and not accrued — it is simply forgiven each month.

Step 1

Interest accrues on your loan balance each month

Step 2

Your RAP payment covers as much interest as possible

Step 3

The government waives any remaining unpaid interest

The $50/Month Principal Match

RAP goes beyond preventing balance growth — it actively helps you pay down your loan. If your monthly payment reduces your principal by less than $50, the federal government contributes the difference, up to $50 per month.

Your principal reduction	Government match	Total principal paid
$0	+$50	$50
$10	+$40	$50
$30	+$20	$50
$50+	$0	Your full amount

Key point: Over 30 years, the $50/month principal match alone could reduce your balance by up to $18,000 — even if your own payment contributes nothing toward principal.

Real-World Example: $50,000 Loan at 6% Interest

Let's see how the interest subsidy and principal match work in practice for a borrower earning $30,000/year with a $50,000 loan balance at a 6% interest rate and no dependents.

Monthly Breakdown

Monthly interest accrued: $250.00
RAP payment (2% of AGI ÷ 12): $50.00
Interest covered by payment: $50.00
Interest subsidized (waived): $200.00
Principal reduced by payment: $0.00
Government principal match: +$50.00

Annual Impact

Your annual payments: $600
Interest waived per year: $2,400
Principal match per year: $600
Net balance reduction: −$600/yr

In this example, the borrower pays $50/month while $200/month in interest is waived and $50/month is applied to principal through the match. Without the subsidy, the balance would grow by $200/month.

Balance Over Time: With vs. Without Interest Subsidy

The chart below illustrates the dramatic difference the interest subsidy makes. Using the same $50,000 loan at 6% with a $50/month payment, compare what happens to your balance under RAP versus a plan without an interest subsidy.

Year	RAP (with subsidy)	No subsidy	Difference
0	$50,000	$50,000	$0
5	$47,000	$62,000	−$15,000
10	$44,000	$76,000	−$32,000
20	$38,000	$110,000	−$72,000
30	$32,000	$152,000	−$120,000

Estimates assume a constant $30,000 AGI, 0 dependents, 6% fixed interest rate, and $50/month RAP payment over the full period. Actual results will vary as income changes over time.

Without subsidy: The $50/month payment covers only 20% of the $250 monthly interest. The remaining $200 capitalizes each month, causing the balance to more than triple over 30 years.

With RAP subsidy: Unpaid interest is waived and the $50/month principal match steadily reduces the balance. After 30 years, the remaining balance is significantly lower — and is forgiven.

RAP vs. SAVE Plan Interest Subsidy

The SAVE plan (which ended when RAP took effect on July 1, 2026) also offered a full interest subsidy. Here is how the two plans compare on balance-protection features.

Feature	RAP	SAVE (ended)
Interest subsidy	100% of unpaid interest waived	100% of unpaid interest waived
Principal match	Up to $50/month	None
Payment formula	Fixed % of AGI (1%–10%)	5%–10% of discretionary income
Forgiveness timeline	30 years	20–25 years
Balance growth possible?	No	No
Balance actively reduced?	Yes (principal match)	Only if payment exceeds interest

Bottom line: RAP matches SAVE's interest subsidy and adds the principal match — a feature no previous IDR plan has offered. This makes RAP the most aggressive balance-reduction IDR plan ever available.

Who Benefits Most from the Interest Subsidy?

The interest subsidy and principal match provide the greatest benefit to borrowers whose monthly payments are significantly lower than their monthly interest charges. This typically includes:

✓Low-income borrowers — Those earning under $40,000 pay 1%–3% of AGI, often far less than monthly interest
✓High-balance borrowers — A $100,000 balance at 6% generates $500/month in interest; the subsidy covers whatever your payment does not
✓Graduate school borrowers — Often carry large balances with higher interest rates, making the subsidy especially valuable
✓Borrowers with dependents — The $50/dependent deduction lowers your RAP payment further, increasing the subsidized amount

Sources & Methodology

The information on this page is based on the Repayment Assistance Plan as established by the One Big Beautiful Bill Act (P.L. 119-21), signed into law in 2025 and effective July 1, 2026. Key provisions referenced include:

•Interest subsidy: Section establishing that unpaid interest under RAP is waived rather than capitalized
•Principal match: Section providing up to $50/month in government principal contributions when borrower principal reduction is below that threshold
•Income bracket schedule: AGI-based payment tiers from 1% ($10,001– $20,000) to 10% ($100,001+), with a $120/year minimum for incomes at or below $10,000
•Balance projections in the comparison table are simplified estimates assuming constant income and interest rate over the repayment period

This calculator and guide are for informational purposes only and do not constitute financial or legal advice. Consult a qualified financial advisor or your loan servicer for guidance specific to your situation.

See How RAP Affects Your Loans

Use our free calculator to estimate your monthly RAP payment, see how much interest would be subsidized, and understand your path to forgiveness.

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RAP Interest Subsidy: How It Prevents Your Balance from Growing

How the RAP Interest Subsidy Works

The $50/Month Principal Match

Real-World Example: $50,000 Loan at 6% Interest

Monthly Breakdown

Annual Impact

Balance Over Time: With vs. Without Interest Subsidy

RAP vs. SAVE Plan Interest Subsidy

Who Benefits Most from the Interest Subsidy?

Sources & Methodology

See How RAP Affects Your Loans

Frequently Asked Questions

More RAP Tools & Guides

RAP Calculator

RAP Income Brackets

RAP Forgiveness

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SAVE to RAP Transition

RAP vs IBR Comparison