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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?

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. 

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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.


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.

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