Congressional Republicans are undertaking a massive budget reconciliation effort involving significant reforms to the federal student loan system. House Republicans introduced their proposal on Monday, which would sweep away the maze of nearly a dozen different loan repayment plans and create just two: a standard repayment plan and an entirely new income-driven repayment (IDR) plan.

In addition to simplification, the proposal aims to address the most vexing problem in the income-driven repayment system: negative amortization, when borrowers who make their payments every month nonetheless see their outstanding balances rise because they aren’t paying enough to cover interest. The House proposal would ensure that borrowers who keep up with their payments will pay down their principal over time—and eventually pay off their balances in full, without the need for loan forgiveness.

The new IDR plan is called the “Repayment Assistance Plan” (RAP). Here’s how it works:

• Borrowers’ monthly payments are set according to their income. There is a $10 minimum monthly payment. Above that, borrowers pay one percent of their income if they earn between $10,000 and $20,000, two percent of their income if they earn between $20,000 and $30,000, and so forth. This sliding scale caps out at 10 percent of income for borrowers earning more than $100,000.
• Borrowers with children receive $50 off their monthly payment for each child.
• If the payment is not enough to cover interest, the government waives unpaid interest. Moreover, the government provides a subsidy to ensure the principal balance falls by at least $50 every month, if the payment is insufficient to pay down the balance by that much on its own. This ensures that borrowers who keep up with their monthly payments never see their balances rise.
• Colleges will be responsible for helping the government cover a portion of these subsidies. (More on that in a future post.)
• Most borrowers are likely to pay down their debts rapidly and not require loan forgiveness. But just in case, any remaining balances are discharged after 30 years.
• RAP will be the only IDR plan for new borrowers going forward. Borrowers who have outstanding loans today may also opt in.

Let’s walk through an example. Consider a typical undergraduate borrower who finishes college with $30,000 in debt (about the average). Her starting salary is $45,000, which rises over time at a typical rate. She enrolls in RAP immediately after entering repayment.

Initially, she pays four percent of her income, which works out to a monthly payment of $150. That is insufficient to cover monthly interest of $163. The government therefore waives $13 of unpaid interest. It also provides an additional subsidy worth $50 to ensure she pays down her principal balance by at least that amount. Even though her payments don’t cover interest, in just the first month her balance drops from $30,000 to $29,950.

Fast-forward three years. Our borrower’s salary has risen to $57,000. She now pays five percent of her income for a monthly payment of $237. Now, her payment fully covers interest and she no longer needs a government subsidy to pay down her principal. As her income rises, her payments rise as well—and principal goes down faster. Ten years after entering repayment, she pops champagne as she makes the final payment on her loans.

Contrast RAP with another IDR plan, which the Biden administration created without the consent of Congress. The House bill would repeal Biden’s plan, known as SAVE. SAVE slashed monthly payments to $0 for most borrowers. While that might look good in the short term, SAVE borrowers pay their loans for far longer, because they aren’t paying down principal. SAVE requires mass loan forgiveness to make it all work: our typical borrower carries her loans for two decades and still has around $11,000 forgiven at the end.

While RAP has higher payments than SAVE, they’re worth it: those higher payments combined with a principal subsidy mean loan balances decline rapidly. In addition, the plan is far less of a drain on the federal budget: taxpayers get their money back faster and rarely have to shell out for loan forgiveness. I estimate that our typical borrower’s loans will cost the government nearly $6,000 less under RAP relative to SAVE.

Congressional Republicans undoubtedly like the plan for its fiscal savings. But slaying the demon of negative amortization could be far more consequential. Under current IDR plans, three-quarters of borrowers see their balances rise over time because monthly payments don’t cover interest. RAP would end this practice. Instead of simply slashing payments and asking borrowers to wait around for forgiveness, the new plan gives borrowers confidence that they can pay off their debts on their own.