Beware the Dangers Behind the Graduated Repayment Plan

graduated repayment

When you’re facing a long road to student debt payoff, it can be pretty tempting to ignore your monthly statements. After all, if you’re just starting out, what’s the point of keeping tabs on your balance?

Two years into my student loan repayment, I decided to stop ignoring my statements. And I was able to ignore them for so long because I mailed in my payments. You know, back in the day when online payments weren’t really a thing yet.

I also didn’t bother to check the balance afterward. Boy, did I get a rude awakening when I finally did.

You see, I just assumed my payments had been chipping away at my balance the whole time. I knew my balance wasn’t going to be way lower, but when I found out that my balance hadn’t changed at all, I was more than a little surprised.

So how did two years of making payments do absolutely nothing to pay down my student loan balance? After a few frantic phone calls, I discovered the culprit: the graduated repayment plan.

How the graduated repayment plan works

At first glance, the graduated repayment plan sounds great. It’s structured to keep your payments low in the beginning and gradually increase every few years. For my plan, the payments were the lowest in the first five years, then went up in the next five, then peaked in the last 10.

Now, these plans go for 10 years with a payment increase every two years, although borrowers with consolidation loans can get a 30-year plan. There’s also an extended graduated repayment plan, which gives borrowers up to 25 years.

The line of thinking behind the graduated repayment plan and extended graduated repayment plan is that your income will likely increase as your career progresses. Therefore, your payments will increase the same way.

This helps give you sort of a financial break at the beginning of your career. I remember after my graduation (no job yet in hand) feeling incredibly grateful for this option.

So where’s the danger? It’s all in how low the first few years of payments can be.

Review your graduated repayment plan carefully

As a naive and overwhelmed soon-to-be graduate, I didn’t ask my financial aid officer why the payments were lower in the first few years. It didn’t even occur to me ask that, or to ask how the payments are applied in general.

It wasn’t until that day two years later when I finally opened my statement that I understood what was going on. To this day I remember that phone call because of the shame and embarrassment I felt afterward.

What I learned in that call was that the payments are lower in the first few years because they’re interest-only. I was paying less because I wasn’t paying on my balance at all.

Not understanding the catch in the graduated repayment plan made me powerless to take the lead on my debt payoff. If I simply put an extra $50 on my payments each month, I could have made some progress on my balance. But I didn’t because I thought I already was making progress.

This was a big mistake on my part – and one I learned from. Now I make sure to find out all the details I can on any financial agreements I sign. I never want to be in the dark with my money again.

Lower payment plans slow down debt payoff

There are many repayment plans designed to lower your monthly payment.

Besides the first few years of the graduated repayment plan and extended graduated repayment plan, there are also income-driven plans that can lower your payments. And while these plans can be a massive help on a monthly budget, they can also slow down total payoff.

These plans free up room in our budgets for food, shelter, and general life needs. But they do nothing to chip away at your debt, which is why they shouldn’t be your default choice for repayment.

There were times when the graduated repayment plan was an absolute lifesaver for me. But it was also a crutch – I didn’t have to pay more so I usually didn’t. And now, ten years later, I’m frustrated about the result:

By the time I’m finished paying off my loans, interest will increase the total amount paid by a lovely $10,000. That’s 10 grand that could be in my retirement fund or emergency fund or even a down payment on a home.

But instead, it’s going to my lenders. That’s not exactly how I’d prefer to spend my money. How about you?

Get back on the payoff track

If you’re on a plan that lowers your monthly payments, don’t switch plans immediately. These plans can be tremendously helpful!

But if you want to make sure you don’t fall off the debt payoff track, review your finances every three months and see how your monthly payments can fit in. Maybe you’ll have paid off a credit card or gotten a new job in that time and have more room in your budget. If so, increase your monthly payments a bit.

You don’t even have to change plans, either. If you’re making automatic payments, just increase the amount accordingly.

The point is, don’t become complacent like I did. Look for ways to pay a little more when you can so your plan doesn’t keep you in a holding position on your debt.

Also, consider applying extra income like work bonuses, tax refunds, and even birthday money to your loans. The momentum you’ll gain can knock months or years off your total payoff time.

Now that I’m in the last decade of my loan payoff, my payments are going toward interest and the balance. But that doesn’t mean I’m not trying to find more ways to pay the balance off faster and correct my past mistakes.

Plus, if I can hit that zero balance before my 20 years are up, my budget will get a nice raise, and I’ll save money on that extra interest. Then I can finally do fun things with my money instead of linw the pockets of my lenders.

And if you’re trying to pay your student loans off early too, check out our student loan prepayment calculator below and get started on creating a plan of attack.

Student Loan Prepayment Calculator

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