How to Decide Between Standard or Graduated Loan Repayment

Written by: Kristyn Pilgrim
Updated: 4/24/20

Student loans from private organizations, like banks, and the federal government help young adults get postsecondary education. Once you complete your degree, you must start paying these loans back. Getting a job is the first step, of course, but what if you don’t make enough to live on and pay your student loans?

The Department of Education has several generous repayment plans you can use to pay off your federal student loans. While you can pick one of these when you first accept the loan, most students allow their default payment plan to be the standard payment plan. This involves paying a set monthly amount that includes accrued interest and a little on your principal over 10 years.

Students who expect to make more money as they pursue a career can choose the graduated repayment plan. This plan starts with low monthly payments, allowing you to take entry-level work without worrying about your finances. Monthly payments go up every few years, ideally as you get raises and advance in your career.

You can switch payment plans after you graduate or choose one as you enter school. Which plan works best for you?

Here are some ways to decide between standard vs. graduated repayment plan options. 

The Standard Repayment Plan

The standard repayment plan is currently the default option for all federal student loans, like:

  • Direct loans, subsidized and unsubsidized.
  • Direct PLUS Loans.
  • Direct Consolidation Loans.
  • Stafford loans, subsidized and unsubsidized.
  • Federal Family Education Loans (FFEL), PLUS loans, and consolidation loans.

Under the standard plan, you pay a minimum of $50 per month, every month for 10 years. This equates to 120 total payments.

There are two exceptions to the 10-year payment span: FFEL Consolidation Loans and Direct Consolidation Loans, which collect all your federal loans and put them into one larger loan. Then, payments are spread out over 10 to 30 years, depending on your total education debt.

This is the default plan if you do not choose another option when you sign up for federal student loans. This plan is not recommended for graduates pursuing Public Service Loan Forgiveness (PSLF) because this group benefits from income-driven plans. The standard plan only considers the overall amount of money you owe, how the interest accrues, and how that mathematically divides up each month over 10 years.

The Graduated Repayment Plan

The graduated repayment plan covers the same types of federal student loans as the standard repayment plan. Like the standard plan, the graduated plan spans 10 years, except for consolidated loans, which can span between 10 and 30 years.

With the graduated repayment plan, monthly payments function differently. 

  • Your initial monthly payments will be very low.
  • Payments increase every two years.
  • Payments will never be less than the amount of interest that accrues on the loan.
  • Each payment will not be more than three times greater than any other payment.

This plan works well for certain graduates, such as those who enter career fields they plan to work in for decades and those with low-paying, entry-level jobs who expect to make more money through raises and promotions as they continue down their career track. It is also good for graduates who expect to make a lot of money eventually, but who are not in that position yet.

Like the standard plan, the graduated plan is not recommended for those pursuing PSLF because it does not base payments on your income level.

Comparing Standard vs. Graduated Loan Repayment

Standard and graduated repayment plans are very similar. Monthly payments are divided up over the same period, payments do not take your actual income into account, and you can use either option on the majority of federal student loans. The biggest difference is how monthly payments are structured over 10 years.

There are some downsides to the graduated plan, including:

  • If you do not make as much money as you thought, you will struggle to pay off your loan.
  • If you do not stay on the same career path, you may not see an increase in your income consistent with your loan payment increases.
  • If you do not estimate your entry-level wages accurately, you could still struggle with the graduated plan.
  • You will pay more in interest on the graduated plan compared to the standard plan.

The standard plan has the most expensive monthly payments of any option provided by the Department of Education. Because entry-level work in any career pays less than senior management or higher positions, graduated repayment can make sense for more people.

Unlike standard repayment, the graduated plan is not automatic. You can choose this option when you get your financial aid award package and begin accepting money to pay for school. You can also contact your loan servicer at any point, including after you graduate, and ask to switch.

While you can switch to the graduated plan years after you graduate, this approach makes more sense for those who are new to the job market.

If you struggle to pay your student loans for reasons related to your income after you have been in the working world for a few years, consider switching to income-driven repayment options. Unlike both standard and graduated loan repayment, monthly payments are based on your income and family size, so they are more manageable.

With the income-driven repayment plan, monthly payments are also spread over 20 or 25 years rather than 10 years. However, you will spend more time paying these loans, which can ultimately become a greater financial burden than sticking with a standard payment plan.

Other Loan Payment Options Exist for Private Student Loans

Understanding standard vs. graduated repayment plans can help you decide which works better for you once you get your first job after graduation. However, these options are only available for federal student loans through the Department of Education.

If you have private student loans, the repayment terms will be different from the federal government’s terms. You may even pay back these loans in less than 10 years. Contact your loan servicer to learn about your options