Home » Income-Driven Repayment

Extended and Graduated Repayment Plans are Terrible

In almost every circumstance where you have federal student loans with over 5% interest, the Extended and Graduated repayment plans are a bad idea. However, if you look at the stats from the federal government, hundreds of thousands of people use these alternative loan repayment options. I literally have no idea why. After you read this article, maybe you'll understand.

There are limited applications of long-term repayment terms for student loans. However, in my experience, the vast majority of people on the Extended and Graduated repayment plan just cost themselves a lot of money.

What is a Graduated Repayment Plan?


YouTube video

Usually, when you take out a loan and pay it back, you pay a fixed monthly payment over time. It could be something like $500 a month for 20 years.

What if you could pay a smaller amount today and a higher payment amount when you're close to the end of the repayment period? That's a Graduated repayment plan in a nutshell.

Does this payment plan sound familiar? A Graduated repayment plan is a less extreme version of the balloon payment mortgage like we experienced in the financial crisis. I have frequently seen borrowers who cannot afford fixed payments choose Graduated instead.

As a whole, someone using the Graduated repayment option wants to eventually pay back their loans. However, they are cash-constrained and cannot afford big payments today. That's why they choose an option that allows them to pay less in the present while paying more later.

Why Graduated Repayment bothers me with student loans

If you're on the Graduated repayment plan, you don't have a strategy and it's costing you money and increasing the total amount you pay back over the life of the loan. That's just the simple truth.

According to the federal government's reports, over 350,000 Americans are currently using a Graduated repayment plan longer than 10 years. In almost every case, the payment they make under this plan would be smaller using income-driven repayment. This is because your payment is based on your discretionary income and family size.

If you can't afford to make substantial payments, why wouldn't you want to temporarily be on a plan like Saving on a Valuable Education (SAVE) — formerly REPAYE — with awesome interest subsidies? If your income will remain low long-term, why not use Pay As You Earn (PAYE) and go for forgiveness of your remaining balance after 20 years?

Maybe you're dedicated to paying back your loans. In that case, you'd want to refinance to a 20-year loan term, which should produce affordable monthly loan payments.

In short, if you're using the Graduated plan for student loan repayment, you need to contact me because I can almost certainly save you money on your outstanding balance.

What is the Extended Repayment Plan?

This option allows for the smallest payment if you don't have a consolidation loan. You can pay a fixed amount for as long as a 25-year term. That means much smaller monthly payment amounts than what you'd need to make on the 10-year Standard Plan.

This plan is far more popular than the Graduated plan. Currently, about 1.74 million Americans use Extended repayment for their student loans. Why is it so popular? I think a lot of people have a strong comfort level with 30-year mortgages, so they like long-term debt.

A lot of the clients I've worked with who've used this plan before speaking with me say that they appreciated that this loan program had them getting out of debt before they died (joking but half-serious).

Occasionally, I'll run into an older borrower with 2% to 3% debt that is using Extended repayment as a strategic decision. He or she believes that they can earn a greater return by investing instead of paying down their debt, and they are probably correct. I don't have a problem with using the Extended repayment plan if your debt has that low of an interest rate.

When is the Extended Repayment Plan a bad idea?

If your interest rate is over 5%, why would you stretch out the loan and incur a ton of interest? Using the Extended repayment plan, in this case, is not strategic. It's usually just uninformed.

If you struggle to make monthly student loan payments, then you should be using an income-driven option like income-based repayment (IBR), income-contingent repayment (ICR), PAYE or SAVE (formerly REPAYE).

Plan on refinancing? You should be on SAVE because of the interest subsidies. If your income will remain low long-term, then you should be using PAYE and paying as little as possible.

What's troublesome is that payments made on Extended repayment do not count towards student loan forgiveness. I can't tell you how many borrowers used this plan only to find out that they made years of unnecessary payments.

Ask yourself if you want to be out of debt one day? If so, DO NOT use the Extended repayment plan. If you can't get a lower interest rate through a refinancing lender, then use an income-driven plan.

Federal loans offer much better student loan repayment plans that save you money and give you a shot at actually paying down debt. You can talk to us or your loan servicer about the best option. You'll also want to check out Public Service Loan Forgiveness (PSLF) or other IDR plans to get a lower minimum monthly payment. 

Get Started With Our New IDR Calculator

What about the Standard Repayment Plan for Consolidation Loans?

Maybe you didn't know this, but the Level or Standard Plan for federal Direct Stafford loans and Direct Plus loans is typically ten years. You can choose a Graduated or Fixed repayment option.

However, if you consolidate your loans, suddenly the repayment period can go as long as 30 years if you owe more than $60,000.

I imagine the Department of Education created this loophole before the advent of income-driven repayment. Perhaps they thought that a primary reason someone would consolidate with Direct Consolidation Loans would be because they couldn't afford payments. Hence, the government created an option to pay with a really long term and a low monthly payment.

For consolidation loans, you can theoretically choose a 30-year fixed or graduated repayment option.

Only in the most extreme circumstances would I ever want someone doing this with their federal student loan debt, with one exception. If your loans happen to be below 5% interest, or if you have higher interest loans you're paying down elsewhere, a 30-year plan could be the smart thing to do.

Perhaps you've run out of deferment and forbearance options and have high-interest credit card debt to pay back first. That'd be a valid reason. Maybe you've got a super low-interest rate and want to stretch the debt out as long as you can. That'd also be legitimate.

However, please don't use a 30-year repayment plan just because you can. Paying 5% to 7% interest over such a long time frame virtually assures that you will not build wealth. That means delaying retirement until well into your 70s.

In short, refinance or get on income-driven repayment

There are two ways to pay back student loans. One is the super aggressive refinance to a five- to seven-year loan and make pre-payments to be debt-free as soon as you can. The second is to minimize payments under an income-driven option as much as possible and save for the tax bomb for long-term forgiveness over 20 to 25 years. While your remaining loan balance is forgiven after the repayment term, that amount is taxable with an IDR forgiveness program. 

Graduated, Extended and 30-year federal student loan repayment plans do not fit into either one of those two strategies. If you're using one of them, you're throwing money away.

Send me an email or use the button below. Let's get you off a money-losing strategy and get you new loan options. Spread the word to classmates as well so they can save too.

FAQs

What does graduated repayment mean?

A graduated repayment plan offers student loan borrowers lower monthly payments that increase over time. Typically, these graduated payments increase every two years.

Is graduated repayment a good idea?

Graduated repayment is an option for federal student loan borrowers to make payments more affordable initially while increasing over time. If making student loan payments is a struggle, you might consider an income-driven repayment option instead.

Not sure what to do with your student loans?

Take our 11 question quiz to get a personalized recommendation for 2024 on whether you should pursue PSLF, Biden’s New IDR plan, or refinancing (including the one lender we think could give you the best rate).

Take Our Quiz

Comments

  1. Jeff March 28, 2018 at 3:21 AM
    Reply

    You can absolutely use these plans wisely. You can use them to minimize your minimum payment. Thus committing less of your monthly budget to the lower interest federal loans and freeing up more to target the highest interest loans.

    • Travis March 28, 2018 at 3:57 AM
      Reply

      Then consolidate the low interest loans and take advantage of the Level 30 year plan to pay even less than Graduated or Extended so you can target the higher interest loans even easier.

      • Ryan October 3, 2018 at 9:39 PM
        Reply

        I have $105k in federal student debt (two loans totaling $35k @ 7.65% and six loans totaling $70k @ 6.55%), have ruled out PSLF, and make too much for IBR. REPAYE is an option, but my monthly starts off nearly $300 lower on Extended Graduated. At this point, I should be able to pay off the entire amount in about 7 years (possibly as soon as 5) if I continue making additional monthly payments. I can probably qualify for 5% if I refinance for a 10-15 year term, but my monthly would be $250-500 higher depending on the term. I kind of like the idea of keeping the federal benefits with my current loans and keeping my monthly as low as possible. I realize I’d pay more in interest in the long-run, but not sure it’s worth giving up those things.

        In this case, do you think consolidating or refi is the best option?

        • Travis Hornsby October 4, 2018 at 4:04 PM
          Reply

          I think a 20 year fixed rate refi would save you a lot more. If you’re doing extended you’re really not using the income driven protections anyway, and many lenders give you 3 mos of forbearance if you lose your job.

          • Rick September 27, 2019 at 10:46 AM

            It specifically states that federal student loan consolidation for allows for up to 3 years for forbearance and 3 years for deferments. There’s no mentioned limit cap of 3 months for unemployment or hardships.

          • Travis Hornsby September 30, 2019 at 10:57 AM

            That’s for student loan refinancing. They’ll usually give you a few months of protection but certainly not a few years.

  2. Eric July 27, 2018 at 10:36 PM
    Reply

    Could someone choose to go on the extended standard plan for lower monthly payments for a certain time an then refinance later? Doesn’t credit score impact refinancing options?

    • Travis Hornsby July 30, 2018 at 9:10 PM
      Reply

      Yes you could use extended and then refi later but the better option would be to consolidate for the 30 year standard plan, which is a lower monthly payment than extended.

  3. Cindy L. September 21, 2018 at 5:37 PM
    Reply

    Great article! It seems that your suggestion for six figure loans especially with high interest rates is to utilize the income driven plan; pay above the minimum if you can and save/invest for the expected tax liability at the end of the 20-25 year mark.

    Seems the goal is to scale down income to fall into a lower tax bracket at that 20 year mark so a $300K tax hit will equate to $90K-$120K tax repayment, as an example.

    What happens if this is your strategy and the rules change at year 15. Is there a grandfather clause in these rules/laws?

    • Travis Hornsby September 21, 2018 at 10:20 PM
      Reply

      Grandfathering is something that the government has practiced for a long time with most federal programs, so it’s unlikely the rules would change for the worse at year 15.

  4. Mateo R. September 21, 2018 at 5:42 PM
    Reply

    Hi – can you please write an article about borrowers with poor credit (late payments, liens, bankruptcy etc) with loans coming out of rehabilitation?

    I’m seeing more and more people defaulting on loans and we are talking about people in their late 30’s. They have $300K plus with 8% interest rates.

    • Travis Hornsby September 21, 2018 at 10:18 PM
      Reply

      We are actually working on that. Thanks Mateo for the suggestion.

  5. Maria M. October 1, 2018 at 7:04 PM
    Reply

    This only makes sense if you don’t plan on aggressively paying down your loan at some point, and there are several other factors involved. I have a higher income now compared to last year and just got married, so my minimum payment under the income-driven plans I qualify for are actually higher than the extended graduated payments. I don’t qualify for some of the income driven plans that would be a lower payment, so that doesn’t help. Right now, I choose to go with the extended graduated, so I can focus on tackling other debts. In two years, I’d have more flexibility and be able to pay more towards my Loans. Each person’s situation is different and they would have to consider the interest as well. The overall tone of this article projects that it’s a stupid idea to be on that plan in general…..

    • Travis Hornsby October 2, 2018 at 2:22 AM
      Reply

      If you’re paying down other debts I assume the interest rate is higher on said debt? In that case, forbearance would probably be a better path until you get to 0 other consumer debt. If you have a low interest rate on your student debt (say stuff from earlier than 2006) then by all means its ok to use those plans. In general, people using extended or graduated would be better off on income driven or refinancing options.

      • Maria M. October 2, 2018 at 3:17 PM
        Reply

        Actually no, the interest rate is pretty much the same. I choose to focus on those debts first because it’s a private student loan and has a higher minimum payment. There’s a reason for having the different federal loan repayment options, because each person’s situation is different. Yes, typically, the extended or graduated plan is not the best option long-term.

  6. Holly October 10, 2018 at 2:49 PM
    Reply

    I agree this article is certainly not for those that have high income and high debt. If I was on income based repayment, I would be paying 1,500 a month and it would be split evenly to my high/low interest loans. It’s better for me to be on extended and then use the extra 1,000 to go toward my higher interest loans. Nice article for those making 30-40,000 tho.

  7. Dell M. October 10, 2018 at 8:02 PM
    Reply

    I agree as I too believe it’s best to choose the lower monthly payment option and use the additional funds to allocate based on avalanche/snowball or whatever repayment strategy works.

    My current loan balance is just under $300K and my income is approx $130K gross. I live in a high cost location so I can only allocate at most $2,000 per month toward payoff. It seems that there is no out for me other than paying off these loans as I would a mortgage – for life.

  8. Stuart Sokolowski December 11, 2018 at 5:06 PM
    Reply

    Hi, Travis. My son just graduated and has $29,000 in Federal Student Loan Debt. Another $50K in private debit. He just got the e-mail asking him which program he wants to choose. What do you think would be wisest. He is currently looking for work in his field and made about $17K last year with a part-time job and some freelance work. I was going to go Graduated Repayment but you’re saying that’s not wise. Please let me know what you think. Thanks.
    Stu

    • Travis Hornsby December 11, 2018 at 6:05 PM
      Reply

      Yeah for the federal debt he could apply with a 0 income and get a 0 required payment on REPAYE with a 50% interest subsidy. Should save him a couple hundred bucks a year.

  9. Becca March 9, 2019 at 1:14 PM
    Reply

    I am on graduated extended plan. It took me forever to find a job and I stupidly let myself get credit card debt. But I decided last year time to get serious and start applying job bonuses toward debt. I paid of all my credit card debt. Right now I am working on savings. I hope to apply next years bonus to pay off my car rest to student loans and then car payment will go to student loans.
    The graduate plan has me on 19 years. Under my plan I am hopefully to pay off in five. I have a good chance at promotions so that will be sooner.

    So I think a graduated plan can work for someone in my situation.

    • Travis Hornsby March 11, 2019 at 9:19 AM
      Reply

      I suggest looking at your payment under the REPAYE plan. It could be lower, which gives you more flexibility with prepayments. If you’re planning on paying the loan off in 5 years, then why not look into refinancing to cut your interest rate? https://www.studentloanplanner.com/refinance-student-loans/

      • Becca August 13, 2019 at 10:33 PM
        Reply

        My interest rate is great only 2.35. I don’t know I will pay off by five years I will probably buy house first. But I am going to up my payment to standards once car is paid off and will apply bonuses to debt.

  10. Robert Smith March 15, 2019 at 9:38 AM
    Reply

    My father has asked me to take over the payment on a Parent Plus Loan he took out on my behalf between 2010-2012, the outstanding balance is $35K. Not to be grim, but with his current health, I do not expect him to live more than 10 years longer. It’s my understanding that once he passes away the remaining balance debt would be forgiven (and not fall to me). That being said, I believe my best bet is to try to get the payment down as much as possible so that I pay the least amount possible in his lifetime. What is the best method for doing this? Thanks.

    • Travis Hornsby March 15, 2019 at 3:22 PM
      Reply

      Just a 20 year loan refinancing term. Commonbond and Laurel Road on this list do that and that would take the payment to about 200 a month. https://www.studentloanplanner.com/refinance-student-loans/

      • Renee Earwood February 10, 2020 at 12:04 PM
        Reply

        I think Robert was referring to a federal loan death discharge which wouldn’t be available if he refinances to a private loan, correct?

        • Travis at Student Loan Planner February 16, 2020 at 3:38 PM
          Reply

          It’s available but your estate might have to pay income taxes on the forgiven loans if it’s private. You don’t if it’s federal. Any interest savings at all though generally pays for a huge term life policy to cover that risk.

  11. Jacob June 24, 2019 at 10:25 PM
    Reply

    For me the extended graduated plan made the most sense. My wife and I both had about 50k of student loans each, but we make high enough incomes that the income driven plans wouldn’t make any sense. I made sure we both had the most extended graduated plans available (I think they were like 25 years, with very low payments for awhile). Our interest rates ranged from something like 2.3% to 6.8%. I wanted to make sure I paid the absolute minimum amount towards the low interest loans as possible so that I could direct the maximum amount of money towards the 6.8% loans each month. Once they were knocked out we hit the next highest and down the line. Eventually we were able to get a home equity loan for 3.5% and used that to pay off everything remaining above 3.5%. It’s only a few years in and I’m still glad we have the low payments on our low interest loans since now all the extra principal is directed to the home equity loan, which I’d rather pay off before the student loans since I can always put them on hold if I needed to. After the home equity loan, I’ll apply extra money each month to my mortgage (also 3.5%). At less than 3.5% I’ll be tempted to just keep the student loans to term and invest my extra money once my secured debt is all paid off. It’s pretty reasonable to make more than a 3% return on investments (my money market account is at 2.3% – I’d definitely rather be putting money into savings than paying off a loan at the same interest rate) By the time the student loan payments go up significantly the home equity loan and mortgage will be gone and I’ll be ready to put extra money towards my last remaining very low interest student loans. This option allowed me to pay the minimum interest of any option by far. I would like to think that a lot of other people with this plan are doing something similar. It can definitely be the best option for certain situations. Remember, most people with student loans are college educated and are likely making informed decisions based on their individual circumstances.

    • Travis Hornsby June 27, 2019 at 3:09 PM
      Reply

      You could certainly defend the extended plan for low interest rate debt, but most of that hasnt been issued in over 10 years. For the 6.8% stuff if you’re paying it down you can get 5% now for 15 year terms in a lot of cases. So you’re saving almost 2% interest and the payment amount wouldn’t be that different from extended but you pay it down much faster bc of the lower rate. So I still stand by the statement that 99% of people using the extended or graduated plans could be on a more optimal holistic option.

  12. Gloria M July 13, 2019 at 11:07 AM
    Reply

    We’ve changed to the extended graduated plan to pay off $70k in 10 months. The lower payment has freed up additional $500 monthly which we are using toward targeting loans. With Navient we would be able to just make interest payments and target principal accordingly. However Fedloan Servicing doesn’t allow for that flexibility. Therefore changing to this plan has allowed us to pay down our balances more quickly.

  13. TSVETA VLAEVA August 9, 2019 at 3:34 PM
    Reply

    Love your content and calculator!! One scenario I don’t see built in: one spouse qualified for PLSF, and the other doesn’t-are you planning a future version where you can run both in the same spreadsheet to see the result together (right now you’d have to run the 2 spouses separately to see the net benefit to each of each program right?)

    • Travis Hornsby August 15, 2019 at 8:15 AM
      Reply

      Right you have to manually piece it together. Right now we just do that analysis for clients bc it would take some major coding changes.

  14. Allen R November 12, 2019 at 2:30 PM
    Reply

    My daughter has 30k in undergrad debt at 4.xx %, 100k in graduate debt at 6-7% and currently 12k in unaccrued interest from the unsubsidized grad loans. She now has a job making 65k. We are considering doing a refi at 4.xx % with someone like Earnest for most of the grad debt and unaccrued interest. That would leave 50k or so on FLS. The Earnest loan would be 15 years, not sure about the FLS program. Is this a good plan? What is your suggestion. Thank you!

  15. Tasha November 20, 2019 at 9:42 AM
    Reply

    The IDR plans suck and it designed not to work against the student in my opinion. I am currently on the REPAYE with a 6.5 interest. Based off my income Nelnet set my monthly payments at $20.32 a month. However, I accrue $280 in interest every month. My balance continues to go up even though I am pay over my monthly payment but under the accrued interest amount because I can’t afford to pay over $280 a month. Nelnet advised me that my payments will continue to go towards interest and my balance will continue to go up as long as I pay under the accrued interest amount. I asked the rep what is the purpose of the IDR if it doesn’t help the borrower, she had no answer. I am outraged at this point and I don’t see a light at the end of the tunnel and it’s so frustrating.

    • Tasha November 20, 2019 at 9:43 AM
      Reply

      ***CORRECTION*** It’s designed to work against the borrower.

    • Travis at Student Loan Planner November 20, 2019 at 10:23 AM
      Reply

      You might be a better candidate for forgiveness if you can’t afford to pay more than 280

  16. Renee Cunningham June 3, 2020 at 11:12 AM
    Reply

    I have a Federal Loan in the amt of 197,000, income driven with public forgiveness, and only 33 payments in. Payment has been increased to 1600.00 month. I cannot afford this and am heading to retirement in 5 years. What would be the most consistent payment method. Thanks

  17. Jason Roelle August 10, 2020 at 12:41 PM
    Reply

    I thought about doing the Consolidated Graduated Repayment option so I could pay 4 times my initial payment minimum, and as my income increases I will have a negligible impact on the increase every two years and pay off my loans faster correct? Or am I missing an important fact?

    • Amy at Student Loan Planner August 30, 2020 at 1:25 PM
      Reply

      It depends on your strategy. If you’re planning to just pay them off, you can usually get a lower interest rate and save yourself some money by refinancing.

  18. Shaun December 2, 2020 at 7:35 PM
    Reply

    I just switched my wife’s loans from a graduated repayment to fixed repayment plan. The goal being we can keep it budget friendly as we plan to build a house in 2021, but also we want to attack the loans with higher interest by making additional payments each month. Is this a bad move to switch to fixed repayment if we are aggressive about making additional payments to the loans with higher interest rates (~5.5%)?

    • Amy at Student Loan Planner December 13, 2020 at 11:14 AM
      Reply

      Fixed payments aren’t necessarily bad. If your plan is to pay them off completely, paying extra can save you a significant amount of money in interest fees.

Comment or Ask a Question

Your email address will not be published. Required fields are marked *