When it comes time to repay your student loans, do you know the best way to do it?
If you borrowed federal student loans, a graduated repayment plan is an option worth exploring. Here’s what you need to know about choosing a graduated payment plan and using it to help you manage your student loan debt.
What is a graduated repayment plan?
The graduated repayment program is designed to help borrowers who have low incomes now but expect to see their earnings rise over time.
That perfectly describes many recent grads who are new to the workforce and may earn entry-level salaries today. But that salary should rise over time as you gain more experience, get promoted, or work your way into better-paying jobs.
A graduated payment plan will allow you to pay off your student loans within 10 years, and, as the name suggest, the payments gradually rise during that period.
You’ll see your monthly student loan payment increase every 2 years if you take advantage of graduated loan repayment.
What loans qualify?
Borrowers who took out the following federal loans are eligible to take advantage of graduated repayment options:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- Direct Consolidation Loans
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- FFEL PLUS Loans
- FFEL Consolidation Loans
While individual loans and consolidated loans both qualify for the program, your graduated payment plan treats each a little differently.
The difference between unconsolidated and consolidated loans
Your graduated loan repayment plan starts with low monthly payments that increase every 2 years for both unconsolidated and consolidated student debt. Your payments will never be less than the amount of interest that racks up between payments, and your payment amount maxes out at three times the amount of payments you could get on other plans.
The major difference in how loans are treated in a graduated repayment plan is the term of the program. For unconsolidated loans, the plan has you pay off your debt in 10 years. With consolidated federal student loans, the term could span from 10 to 30 years.
The length of your repayment period depends on your total education loan indebtedness. This refers to the total amount of student loan debt you carry, including federal loans that are not part of your graduated payment plan and any private student loans.
Here’s how the terms break down:
- If you have no more than $7,500 in debt, your repayment period is 10 years.
- If you have at least $7,500 but less than $10,000, your payment period is 12 years.
- If you have at least $10,000 but less than $20,000 in debt, the repayment period is 15 years.
- If you have at least $20,000 but less than $40,000 in loans, you’ll have 20 years to repay your debt.
- If you have at least $40,000 but less than $60,000, your payment period is 25 years.
- If you have $60,000 or more in debt, your repayment period is 30 years.
The pros and cons of graduated loan repayment
A graduated repayment plan offers borrowers a lot of benefits, including:
- All borrowers are eligible.
- Payments slowly rise over time, which allow new graduates to handle student loan payments on lower, entry-level wages when they enter the workforce. You can pay more when you start earning more.
- You can pay off your loan in 10 years.
But there are downsides, too. Be aware of the following:
- You will pay more over time using this plan than another option (like the standard repayment plan).
- You may still struggle with payments if your income does not rise like you expect it to.
Alternatives to the graduated repayment plan
While the graduated repayment plan can help many borrowers, it’s not for everyone. Be sure to check out other federal programs designed to help you pay back your student loans.
- Standard repayment plan: Get a set payment that you pay over 10 years (unless you consolidated your loans) and save the most money on interest with this plan.
- Extended repayment plan: Payments can be fixed or graduated, and the plan allows you up to 25 years to repay what you owe. You will pay more in interest if you choose this route than you would on the standard plan.
- “Pay As You Earn” (PAYE) and REPAYE: These two loan repayment plans are only open to borrowers who meet certain requirements. Payments are calculated based on your household income and family size, and are set at 10 percent of your discretionary income.
- Income-based repayment plan: You must have a high debt amount relative to your income. With this plan, your payments are set at 10 to 15 percent of your discretionary income.
- Income-contingent repayment plan: On this plan, your payments are 20 percent of your discretionary income, or they can be the amount you would pay on a repayment plan with a fixed payment over 12 years. That number is adjusted according to your income.
Make sure to explore all your options before choosing the plan that will benefit you the most. Ask questions and do your research, then call your loan servicers to get their help in deciding on a plan that’s right for you.
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