Heads Up: The Fed continues to raise rates — up 3% this year — making credit card debt even costlier.
Pay it off today with a low fixed-rate personal loan. View your rate —>

The Pros and Cons of Graduated Repayment Plans

October 20, 2018 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

The Pros and Cons of Graduated Repayment Plans

Graduation from college or grad school is a time to celebrate the great achievement of years of hard work. But once the party is over and those mortarboards hit the ground, many graduates will be thinking of their next steps: new careers, new cities, and a life filled with new experiences and responsibilities.

For most recent grads, one of those responsibilities is a major one: managing and organizing the repayment of student loans. The average undergrad leaves school with $39,400 in student loan debt, joining the growing population of Americans who, together, are repaying a total of $1.48 trillion in student loans.

Managing the repayment of a federal student loan debt can require strategy, organization, diligence, and a bit of know-how, especially when it comes to picking a repayment plan.

There are several federal repayment options: the standard plan, income-driven plans, and the graduated repayment plan, among others. For a recent grad overwhelmed by new choices and decisions, parsing out the details of these loans can be a chore—one that frequently gets ignored.

The graduated repayment plan is one that’s often not well understood by borrowers and its usefulness has been somewhat replaced by newer repayment options like income-based and income-contingent plans. But, for some borrowers, this plan can be a useful way to begin repayment slowly but still pay it all off in ten years.

In this article, we’ll cover how the graduate repayment plan works and compare the graduated vs. the standard repayment plan. We’ll also cover the pros and cons of this plan so you can decide whether it’s right for your debt payoff strategy. Let’s take a look.

How Do Graduated Repayment and Extended Graduated Repayment Plans Work?

Graduated Repayment Plan

The graduated repayment plan is designed to help keep repayment costs low for recent graduates who may have lower starting salaries but who expect to see their salaries increase substantially over ten years.

Under the graduated repayment plan, the repayment term will be ten years, which is the same length as a standard repayment plan. On a standard repayment plan, you will pay the same fixed amount each month for the length of the term.

On a graduated plan, your payments will be lower than what you would pay if you were to stay on the standard plan, but never too low that you aren’t paying the amount of interest that is accruing each month. Then, every two years, your payment amount will increase.

Extended Graduated Repayment Plan

This plan works a lot like the graduated plan, however the repayment term is over 25 years rather than ten. Typically, borrowers who select this plan will have lower monthly payments than they would under the standard or graduated plans. While their payments will increase over time, they’ll do so more gradually than they would under the extended plan due to the longer term.

With this plan, borrowers may have a much lighter bill to pay each month than they would on many other plans, however, they will end up paying a lot more in interest over time.

What Are The Benefits Of A Graduated Repayment Plan?

There are a couple of pros to the graduated repayment plan. The main benefit is that your payments will be low for the first few years of repayment. This can be a big help to recent graduates on entry-level salaries who may not have a lot of cash flow and are just learning how to build a solid financial foundation while staying within their budget.

Payments will increase over time, but, your repayment term (for unconsolidated loans) is ten years, which means that if you make scheduled payments, you’ll be finished paying off your debt relatively quickly. For consolidated loans, your repayment period will depend on the amount of debt you have and could be between ten and 30 years.

What Are The Drawbacks Of A Graduated Repayment Plan?

There are a number of drawbacks to the graduated repayment plan, which can make it a less attractive option than some of the other repayment options available. First, even though you’ll be paying off your loans in ten years, you will end up paying more in interest using this plan than the standard plan.

Why? Because with the graduated plan, you’re making lower payments in the first few years. As a result, you’re not paying down as much of the principle as you would be on the standard plan which means you’re paying more in interest over time.

Another potential drawback is that your payments are scheduled to increase every two years. Depending on the amount you owe, these increases can be staggering. For instance, let’s say you’ve just graduated from medical school and are repaying a $100,000 student loan on a graduated repayment plan over ten years.

Your starting payment may be around $600 a month but, for the last years of your loan, you might be paying a whopping $1,900 per month. That’s more than a lot of people pay on their mortgages each month.

While the lower payments up front might fit your budget as you start your career, it’s hard to predict whether your salary will increase at just the same rate as your payments will. However, if you end up having a difficult time making the higher payments that eventually come with a graduated repayment plan, you can switch to an income-based plan or an extended plan.

While this would lower your payments for the time being, doing so will likely lengthen the term of your loan. This means you’ll be paying a lot more in interest over time.

Refinancing Student Debt vs. Graduated Repayment Plans

Once you’ve gotten settled into a steady job and have a good cash flow each month, another option to consider is refinancing your student loans with a commercial lender. When you refinance, you are essentially using one new loan to pay off all your student loans. Then you just have the new loan to repay, which will have a new interest rate and new terms.

There are a number of benefits to refinancing. Depending on your financial profile, you could get a much lower interest rate as well as a lower monthly payment. Doing so could help increase your cash flow in the present while saving you money in interest over time. Additionally, replacing all your loans with one loan will help you streamline your repayment. Some lenders even allow you to refinance private and federal loans together.

Refinancing your loans with a commercial lender at a lower interest rate can potentially save you thousands of dollars in interest of the life of your loan. However, when you refinance, it does mean that you give up some of the benefits that come with keeping your federal loans. This includes the option of putting your loans in deferment or forbearance if you have a financial hardship or return to school full time.

You’ll also lose the option of being able to use an income-driven repayment plan, which can be a useful tool if you were to take a job with a lower salary in the future. The other option you can lose is the ability to have your loans forgiven after a set period of time if you’re on an income-driven plan or are in an eligible public service job.

If you foresee a need to use any of these benefits that come with federal loans, it might be a good idea to keep your federal loans. But, if you have built a strong financial foundation and have a steady income coming in, refinancing could be the best strategy for paying your loans down quickly—and for saving money in the process.

Ready to see whether refinancing is right for you? Check out SoFi.com and get a free rate quote in just minutes.

Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender