Pros & Cons of the Graduated Student Loan Repayment Plan

Written by: Kristyn Pilgrim
Updated: 4/23/20

There are different types of repayment plans for student loans. With private student loans, the borrower usually selects a repayment length and type upfront. But with federal student loans from the U.S. Department of Education, a range of repayment options is usually available throughout the life of the loan.

More students are choosing the graduated repayment plan to help them repay their student loans. This option works well for students who expect to have low-paying, entry-level work after they complete their degree but intend to work in this career path for several years, advancing to higher pay grades over time.

However, the graduated repayment plan means you pay more on your loan over time compared to other repayment options.

What Is a Graduated Repayment Plan & How Does It Work? 

Graduated repayment plans apply to federal student loans. Like the standard repayment plan, graduated loan payments span 10 years. Unlike the standard repayment plan, loan payments under a graduated repayment plan start small and increase over time. This accounts for entry-level jobs having lower pay than mid-level and senior-level positions.

Private student loans are unlikely to offer a graduated payment plan, but many federal student loans are eligible, including: 

  • Direct Subsidized Loans.
  • Direct Unsubsidized Loans.
  • Direct PLUS Loans.
  • Direct Consolidation Loans.
  • Subsidized Federal Stafford Loans.
  • Unsubsidized Federal Stafford Loans.
  • Federal Family Education Loans (FFEL).
  • FFEL Consolidation Loans.

When you accept federal student loans, the default repayment option is standard repayment, with regular monthly payments spanning 10 years. However, many career paths start with low-paying entry-level positions, with salaries and benefits increasing as your skills and experience in the field progress.

Under the graduated repayment plan:

  • Monthly payments, including interest, start small and increase every two years.
  • Payments are spread over 10 years except for consolidated loans, which spread payments over 20 or 30 years.
  • Monthly payments will never be lower than the amount of accrued interest.
  • Payments will not be larger than three times the amount of any other payment.

Ideally, you pay at least a little on your principal every month, but you may pay just the accrued interest in your first few years of paying down the loan. As you advance in your field, and get performance reviews and raises, your loan payments go up.

The Pros & Cons of Graduated Repayment Plans

The graduated repayment plan looks appealing because the first few payments are low. This form of loan repayment starts like an income-driven repayment plan, making it easier for recent graduates who are new to their field to manage their budgets and pay their living expenses.

Pros of the graduated plan include:

  • Twelve interest-only payments that are lower than a principal and interest payment.
  • Less stress each month while you work an entry-level job. 

However, there are some cons to the graduated repayment plan. These include: 

  • You are automatically set up for the standard repayment plan, not the graduated repayment plan, so you must ask your loan servicer to change your repayment options.
  • You will pay more on your loan over time because interest accrues differently than with the standard repayment plan.
  • You will pay more over the same amount of time as the standard repayment plan, so you may feel financially stressed later.

If you budget carefully and know your long-term career goals, the graduated repayment plan can work well for you. 

How Do You Know a Graduated Repayment Plan Works for Your Loans?

To apply for the graduated repayment plan, you must request this repayment option either when you accept a federal student loan or as you graduate and begin to make monthly payments. Federal loans have more flexibility to adjust your repayment options as you go, so get in touch with your loan servicer for help signing up.

Here are some questions to ask that will help you decide between a graduated repayment plan and another option: 

  • Do you expect your income to continue going up over time? Would you consider pursuing a low-paying job for the public good? 
  • Is entry-level work in your career field low-paying, or are you likely to have a comfortable income at your first job? 
  • How stable or stressful is your potential career? Are you concerned about switching jobs or careers in the future? 
  • Are you comfortable with the idea of paying more on your student loans over 10 years due to changing interest rates? 
  • Do you want to pay off your student loans faster than 10 years?

The appeal of low monthly payments for the first few years after college leads many students to switch their payment plans to a graduated payment plan. However, an income-driven plan might work better, especially if you would rather work in a low-paying position for the public good, if you’d like to pursue a form of loan forgiveness through public service like AmeriCorps or the Peace Corps, or if you switch careers.

For people who know exactly what they want to do and understand their career trajectory, the graduated repayment plan works well.

With federal student loans, you can switch payment plans if you need to. While you are in school, it may work best for you to accept the standard repayment plan, so you can learn about your career field and future prospects. This allows you to make a basic budget as you complete your degree and enter the job market. Once you understand your budget for your first few years out of school, you can decide whether you can make standard monthly payments, if you would benefit from a graduated repayment plan, or if you need a different form of payment, including deferring payments for a year or more.

Private student loans have different payment plans, including seven-year repayment options, so you can repay these loans quickly. If your income does not track as expected, work with your loan servicer on refinancing, deferment, or other repayment options for your private student loans.