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Is Graduated Repayment Good for You?

Graduated repayment

The federal government provides multiple repayment options for student loan borrowers. In this way, debtors choose the most suitable repayment plan and pay off debt effectively. One of the repayment options you can choose is a Graduated Repayment plan. This plan is unique due to its lower starting monthly payments. However, as time passes, your repayment amount increases. Hence, it best fits borrowers who expect higher income in the future. 

Yet, many other conditions also make a Graduated plan good/bad for your finances. This guide discusses the plan in detail and presents alternatives in case you do not qualify for a Graduated plan. 

Eligible Loans

Unfortunately, not all loans qualify for a Graduated Repayment plan. If you have Direct Loans and FFEL loans, you have a higher chance to qualify. To specify, Direct and FFEL PLUS loans and their Consolidation loans are eligible for this plan. However, Perkins and private student loans are not covered under Graduated repayment. 

Payments with Graduated Repayment Plan

Repayment plans differ for their payment rates and the repayment period. When it comes to Graduated repayment, it offers a unique payment strategy. First, you start with low amounts of monthly payments. Yet, the rate gets reviewed every two years and increases. In other words, your payment starts low and gets higher as time passes. Such a strategy is beneficial for some borrowers. 

For example, if you find an entry-level position, you know that your salary is not going to be high. Hence, lower monthly payments are desirable. However, as time passes, you gain experience, get promoted, and raise your earning level. In this case, you can afford more debt payments. As a result, you repay your debt effectively, without much difficulty, in 10 years, as required by the Graduated plan. 

Keep in mind that your payments will never be less than the interest accrued between two payments. Besides, it cannot be higher than three times any other repayment plan. 

Consolidation Loans

Both Direct and FFEL Consolidation loans qualify for this repayment plan. However, in these cases, you will face different requirements. As before explained, your payment amount will be low and get higher every two years. Yet, the duration of repayment can be up to 30 years and a minimum of 10 years. Other conditions regarding payment being less than accrual and not more than three times that other plans still hold. 

How to Determine Repayment Period?

Consolidation loans can take 10 to 30 years to repay under a Graduated Repayment plan. Hence, you might hesitate to get extended repayment periods. Luckily, you can calculate roughly how long it will take to repay debt under this plan. The exact number of years depends on your total education loan indebtedness. 

It is a factor that indicates all your debt amount, including consolidated and non-consolidated loans. Non-consolidated loans can be any other student loan you have, whether private or federal, that you did not wish to combine with consolidated loans. 

However, keep in mind that the maximum total amount of non-consolidated debt cannot exceed the consolidated ones. Usually, borrowers show their other education debt in Consolidation applications. They list other loans but mention that they do not want to consolidate these loans. 

Below you can see the official chart from the Student Aid website, which can help you determine how long your repayment will be: 

Graduated repayment

For example, if your total education loan indebtedness is $30,000, it will take 20 years to pay out your consolidated loans under the Graduated Repayment plan. On the other hand, if you have $60,000 and do not want to repay for a long time, this plan might not suit you. 

Advantages of Graduated Repayment Plan

One of the main advantages of the Graduated plan is its shorter repayment period. It takes ten years to repay debt with this plan for loans, excluding Consolidation ones. Compared to other repayment programs, such as Income-driven, this period is short. However, keep in mind that Income-driven plans require 20-25 years. 

Another advantage of this plan is that it is more suitable for fresh graduates. Once you graduate and find a job, your salary might not be high. Hence, you desire lower payments. However, you can improve your qualifications and get a better position in the future. As a result, you will be able to repay higher amounts which will help you repay debt in just ten years. 

Disadvantages of Graduated Plan

Graduated planning has its drawbacks. If it does not satisfy your needs, do not worry. There still exist several federal repayment plans that you can qualify for. We will discuss these plans in the following sections. 

First, the Graduated Repayment plan has short repayment, which means your monthly payments can be in higher amounts than some other federal plans. Besides, if you have Consolidation loans, you will not even benefit from short repayment because it will extend to up to 30 years. Therefore, if you have financial challenges, it is better to seek other solutions such as enrolling in Income-driven plans than a Graduated plan. 

Second, this plan provides no forgiveness opportunity. You need to pay the whole debt balance from your pocket. Meanwhile, Income-based or Pay as You Earn repayment plans can grant forgiveness after the repayment period is completed. Moreover, you cannot qualify for Public Service Loan Forgiveness if you make payments under a Graduated Repayment plan.

Lastly, if your income is not going to increase, you might face financial challenges to afford the repayment in the future. In this case, it is better to change your repayment plan, which will require lower monthly payments. Keep in mind that changing your repayment plan is completely free.  

Alternative Repayment Options

The Graduated RepaymentPlan is not your only option if you have federal student debt. Fortunately, the government provides multiple repayment plans so that you choose the most suitable plan. In this way, you can repay debt effectively and effortlessly. Besides, you can change your repayment plan at any time without any difficulty. 

When borrowers are distributed loans, they choose a loan repayment plan. However, if you want to change your plan, you only need to contact your loan servicer and request to enroll in a new plan. Thus, the whole process is completely 100% free.

The following sections present you with different repayment plans that can be an alternative if you do not qualify for Graduated Repayment or do not wish to enroll. If you feel lost among all these options, you can use a loan simulator, contact a loan servicer or get third-party debt specialist help. We also discuss all these methods in subsequent paragraphs. 

Standard Repayment Plan

Graduated repayment

One of the alternative plans you can qualify for is the Standard Repayment plan. Similar to the Graduated Repayment Plan, you can repay your debt in ten years with this option. It is available to Direct, Stafford, PLUS, and Consolidation loans. 

Unlike the Graduated plan, this plan requires fixed payments. In other words, the amount you pay over the course of repayment does not change. Meanwhile, in Graduated Repayment, your payment increases as time passes. 

When it comes to repayment amount, your monthly minimum payment will be $50. In this way, it allows repaying debt only in ten years. Hence, if you want affordable payments, this plan is not the best option for you. 

Additionally, similar to the Graduated plan, Consolidation loan borrowers will get extended repayment periods, up to 30 years. Besides, you will still not qualify for any type of forgiveness due to repayment method or due to the Public Service Loan Forgiveness program.

Extended Repayment Plan

The Extended repayment plan is a mixture of Standard and Graduated Repayment. It allows both fixed and graduated payments. In other words, you can get non-changing payments like the Standard plan or increasing payments like the Graduated plan. 

However, the difference is that this option allows repayment for up to 25 years. As the repayment period gets longer, the monthly payment amount might decrease. Yet, in the long run, you will end up paying more for the same amount of debt. 

The plan is accessible to broader categories of borrowers, including Direct, PLUS, Consolidation, Stafford, and FFEL loan debtors. However, it has some specific requirements, too. For example, you should not have an outstanding balance on October 7, 1998, and your current outstanding balance should be a minimum of $30,000. Please, check our blogs or the official Student Aid website to get familiar with all details of alternative repayment plans. 

Income-Driven Repayment Plan

Among all federal student loan repayment plans, Income-driven repayment options are most affordable for many borrowers. As the name suggests, these plans are based on income level and family size. If you earn less, you will pay less. However, if your family is small and you earn a good salary, your repayment amount will be high. In all cases, the repayment amount is usually some percentage of discretionary income. Such income is what is left after deducting taxes and other necessary spendings. 

Additionally, if you enroll in one of the Income-driven repayment plans, you will receive forgiveness after the repayment period is done. It is one of the best advantages of Income-driven plans over Graduated Repayment plans. Any remaining amount after 20-25 years of repayment is eliminated with this option. 

Please, keep in mind that you need to recertify your family size and income level every year to maintain your eligibility. The Education Department calculates a new repayment amount based on the updated information. 

Types of Income-Driven Plans

There exist five types of Income-Driven plans with different repayment amounts. You can choose the one that fits your qualifications the best. All plans forgive the remaining debt after the repayment period. Besides, you need to recertify them each year.

1. Income-based Repayment

Income-based repayment is one of the plans that require a high debt-to-income ratio. It is available to many borrowers, but conditions change depending on whether you are a new borrower. For example, new borrowers who received loans after July 2014 will pay only 10% of their discretionary earnings as monthly debt payment amounts. Others should pay 15% of the discretionary income. Additionally, new borrowers repay debt for 20 years, while non-new borrowers should repay student loans for 25 years. Compared to this plan, Graduated Repayment has a significantly shorter repayment period. 

2. Income-Contingent Repayment

If you want to pay a fixed amount per month, the Income-Contingent plan can be a great option. This plan either requires 20% of discretionary income or a fixed payment over 12 years. Moreover, it takes 25 years to repay debt. Therefore, similar to Graduated repayment, you might pay more over time with this plan. Whether you have Direct, PLUS, or Consolidation loans, you can apply to this repayment option. 

3. Income-Sensitive Repayment

The only Income-driven repayment option that covers FFEL loans is Income-Sensitive repayment. Unfortunately, with this plan, you cannot qualify for Public Service Loan Forgiveness. However, it makes total sense because PSLF is not available for FFEL loan borrowers. 

Income-Sensitive plans require 15 years of repayment, and the amount depends on annual income. You can contact your loan servicer or lender to get more information on this plan.

4. Pay As You Earn

This repayment option was created to offer the lowest possible monthly payments to borrowers. Hence, it is not surprising that the Pay as You Earn repayment plan only requires 10% of discretionary income. You will repay this amount for 20 years to get rid of the debt. Besides, any remaining amount after repayment will be forgiven. 

You need to be a new borrower after October 2007 and should have received the first disbursement after October 2011 to qualify for this option. 

5. Revised Pay As You Earn

Another similar program to the plan mentioned above is Revised Pay as You Earn. This requires only 10% of discretionary income. However, differently, the plan requires separate repayment periods depending on your study time. If you are an undergraduate student, you repay debt for 20 years and receive forgiveness for the rest. If you get loans for graduate or professional studies, you repay debt for 25 years and receive forgiveness. 

You can qualify for this program, whether you have Subsidized, Unsubsidized, PLUS, or Consolidation loans. 

How to Determine Which Plan is the Best for You?

Graduated repayment

If you are lost among different options, you can use several methods to determine which plan is best. 

1. Use Loan Simulator

Loan Simulator is a tool designed by the Education Department to help borrowers get an early look at different repayment plans. This tool determines if you are eligible for the repayment plan. Besides, it shows how much your monthly loan repayment amount will be under different repayment options. By comparing these amounts, you can decide whether Graduated Repayment is the best plan for you. You may find out that other plans like Income-driven repayment are more affordable. 

2. Contact Loan Servicer

Loan Simulator is helpful, but it does not provide 100% accurate information. In addition, by the time you apply for the loan repayment plan, you might face different qualifications. Another strategy that can help you determine a new plan is contacting the loan servicer. 

Loan servicers deal with your loan repayment and handle billing on behalf of the Education Department. They also guide borrowers if they face financial challenges or need help to enroll in a new repayment program. By contacting loan servicers, you can get recommendations on which plan will be effective for you. 

Remember that enrolling in a new repayment plan, whether a Graduated Repayment or another, is completely free. Loan servicing companies do not require any fee for such processes. Do not continue communication if you receive a call or get contacted that you need to pay for a new plan. Those are student loan scammers, and they can get your money, credit card details, personal information, etc. 

3. Get a Third-Party Help

Loan servicers can guide you, but they might not provide the best service to all customers regarding graduated repayment and other forgiveness programs. Recently, there have been cases when loan servicers were sued due to misguiding borrowers. Currently, federal loan borrowers are not required to make payments due to the COVID-19 pandemic. However, massive repayment is expected to start in February 2022. At that time, loan servicers will have a huge workload, and they might not be highly effective for your concerns. Alternatively, you can get help from a third-party debt specialist, such as Student Loans Resolved. Our debt experts can analyze your finances and choose the most suitable option to pay out your debt effectively. Debt specialists have years of know-how and experience. Hence, they can find the best repayment plan easily.