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, 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 $37,388 in student loan debt, joining the growing population of Americans who, together, are repaying more than $1.7 trillion in student loans.
Key Points
• Graduated repayment plans allow recent graduates to start with lower monthly payments that increase every two years, helping to accommodate entry-level salaries.
• The repayment term for graduated plans is typically 10 years, allowing borrowers to pay off their loans relatively quickly while managing their cash flow.
• Drawbacks include paying more interest over time due to lower initial payments and potential difficulty handling scheduled payment increases as salaries may not keep pace.
• An extended graduated repayment plan offers lower monthly payments over a longer term of 25 years but results in higher overall interest costs.
• Refinancing student loans can provide a lower interest rate and streamlined repayment, but borrowers lose federal loan benefits such as forgiveness options and income-based repayment plans.
Student Loan Repayment Options
Managing the repayment of a federal student loan debt requires 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. New grads can also consider consolidating or refinancing their student loans into one new loan with a new rate and new terms. 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 has been somewhat replaced by newer repayment options, like income-based and income-contingent plans. For some borrowers, though, this plan can be a useful way to begin repayment slowly but still pay off federal loans in 10 years (10-30 years for consolidation loans).
💡 Quick Tip: Often, the main goal of refinancing is to lower the interest rate on your student loans — federal and/or private — by taking out one loan with a new rate to replace your existing loans. Refinancing makes sense if you qualify for a lower rate and you don’t plan to use federal repayment programs or protections.
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 the next 10 years.
Under the graduated repayment plan, the repayment term for federal loans will be 10 years (10-30 years for consolidated loans), which is the same length as the standard repayment plan. With the standard repayment plan, you will pay the same fixed amount each month for the length of the term.
On the 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
The extended graduated repayment plan is similar to the graduated plan, however, the repayment term is over 25 years rather than 10. Typically, borrowers who select this plan will have lower monthly payments than they would under the standard or graduated plan. 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 more in interest over time.
What Are the Benefits of a Graduated Repayment Plan?
The main benefit of the graduated repayment plan 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 additional 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 10 years. This means that if you make scheduled payments, you’ll be finished paying off your debt relatively quickly. For Direct Consolidation Loans, your repayment period will depend on the amount of debt you have and could be between 10 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 10 years, you will end up paying more in interest using this plan as opposed to 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.
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.
Refinancing Student Debt vs Graduated Repayment Plans
Once you’ve gotten settled into a steady job, another option to consider is refinancing your student loans with a private lender. When you refinance, you are essentially using one new loan to pay off all your current 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, including getting a lower interest rate, a lower monthly payment, or a shorter or longer loan term. 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. Note: You may pay more interest over the life of the loan if you refinance with an extended term.
💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.
Refinancing your loans with a private lender at a lower interest rate and shorter term can potentially save you thousands of dollars in interest over the life of your loan. However, when you refinance, you give up some of the benefits that come with keeping your federal loans, including student loan forgiveness and income-based repayment plans.
If you foresee a need to use any of these benefits that come with federal loans, it might not be in your best interest to refinance. 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.
Refinancing Student Loans with SoFi
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
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.
SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.
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