Guide to Graduated Repayment Plans

Sulaiman Abdur-RahmanUpdated August 9, 2023

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The Graduated Repayment Plan is one of the repayment plans that’s available to federal student loan borrowers. Private student loan lenders, meanwhile, may also offer graduated repayment options allowing borrowers to make interest-only payments for a temporary period.The federal Graduated Repayment Plan gives borrowers a monthly payment that starts low and then gradually increases over a 10-year period for certain federal student loans. The initial monthly payment requirement — at the minimum — may comprise interest-only payments covering the amount of interest accrued on the loan between monthly payments.Most instances of federal student loan interest capitalization have been eliminated under a new rule that went into effect in July 2023. Interest capitalization is when a lender adds outstanding unpaid interest to your principal loan balance and then charges additional interest on the larger principal balance.Interest capitalization no longer occurs when a federal student loan borrower first enters repayment or leaves a forbearance, according to the U.S. Department of Education. Graduated repayment options for private student loans, meanwhile, may allow borrowers to make interest-only payments for several months before making principal and interest payments over the life of the loan.

What Is a Graduated Repayment Plan?

The Graduated Repayment Plan is one of the federal government’s student loan repayment plans. This plan allows federal student loan borrowers to have a monthly payment that starts low and gradually increases over time.Your monthly payment may increase every two years under the federal Graduated Repayment Plan. The Graduated Repayment Plan has a maximum repayment period of 10 years for Direct Subsidized, Unsubsidized, and PLUS Loans, and a maximum repayment period of 10 to 30 years for Direct Consolidation Loan borrowers.Lenders of private student loans may offer several repayment options to private student loan borrowers, including a graduated-style repayment plan. Nonfederal graduated repayment options may allow private student loan borrowers to make interest-only payments for several months.Private student loan borrowers would be required to make monthly payments on principal and interest once the interest-only period ends.

How Graduated Repayment Plans for Student Loans Work

Any repayment plan that starts with smaller monthly payments before ramping up to larger monthly payments could fall under the graduated repayment plan definition.Below we highlight how graduated repayment plans for student loans work:

Graduated Repayment Plan for Federal Student Loans

A graduated student loan repayment plan offered by the U.S. Department of Education allows federal student loan borrowers to have a monthly payment that starts low and gradually increases over time.The Graduated Repayment Plan has a maximum repayment period of 10 years for Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loan borrowers, and a maximum repayment period of 10 to 30 years for Direct Consolidation Loan borrowers. Your monthly payment may increase every two years under the federal student loan graduated repayment plan. Your lowest monthly payment may comprise interest-only payments covering the amount of interest accrued on the loan between monthly payments.Here are some factors you may want to consider:

Some of the ways of using student loans may include using the funds toward tuition and school supplies
Borrowers can make more than the minimum payment when paying off student loans
One way for lowering your student loans payments could be to refinance your student loans with a private lender
You can refinance federal student loans and private student loans, but the portion of your federal student debt that you refinance loses its eligibility for federal debt relief, including military student loan forgiveness for members of the U.S. armed forces
Other disadvantages of refinancing federal student loans is there’s no guarantee your application for student loan refinancing will be approved
For subprime borrowers, it might be difficult to refinance student loans with bad credit
Your interest rates on private student loans can go lower than 5% or higher than 10%
The average federal student loan debt across the United States is more than $37,000 per borrower, according to the Education Data Initiative

Graduated Repayment Plan for Private Student Loans

Lenders of private student loans may offer a graduated-style repayment plan. A nonfederal graduated repayment plan may allow private student loan borrowers to make interest-only payments for several months. The interest-only payment period may begin when the borrower takes out the private student loan for postsecondary education and end nine months or 12 months after the borrower graduates or stops attending school. Private student loan borrowers would be required to make monthly payments on principal and interest once the interest-only period ends.

Standard vs Graduated Repayment Plans

The federal government offers a variety of student loan repayment plans, including the Standard Repayment Plan and the Graduated Repayment Plan.The Standard Repayment Plan is the basic repayment plan for federal student loan borrowers. Borrowers are generally responsible for a monthly payment of at least $50 or more under the Standard Repayment Plan. The repayment period is up to 10 years on most federal student loans but between 10 and 30 years for Direct Consolidation Loans and Federal Family Education Loan (FFEL) Consolidation Loans.The U.S. Department of Education’s Graduated Repayment Plan allows federal student loan borrowers to have a monthly payment that starts low and gradually increases over time. The Graduated Repayment Plan has a maximum repayment period of 10 years for Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loans, and a maximum repayment period of 10 to 30 years for Direct Consolidation Loan borrowers.The big difference between the federal government’s standard and graduated student loan repayment plans is that your monthly payment may increase every two years under the Graduated Repayment Plan while the Standard Repayment Plan features fixed monthly payments. Another difference is that monthly payments under the Graduated Repayment Plan may be less than $50, whereas monthly payments under the Standard Repayment Plan may not fall below $50 except for the final payment.When comparing the U.S. Department of Education’s standard vs. graduated repayment plan options, all federal student loan borrowers are eligible for the standard and graduated repayment plans.A private student loan graduated repayment plan may feature interest-only payments for a limited time before the borrower is required to make regular monthly payments toward the principal and interest. Private lenders that offer a graduated-style repayment plan may also offer basic repayment plans that require borrowers to make full monthly payments toward principal and interest over the life of the loan.

Other Repayment Plans

Below we highlight additional federal student loan repayment plans

Extended Repayment Plan

Borrowers with federal student loans may be eligible for the Extended Repayment Plan. This plan allows you to repay your federal student loans over an extended period up to 25 years. Monthly payments under this plan could be a fixed or graduated amount.

Income-Driven Repayment Plan

The U.S. Department of Education offers the following four income-driven repayment (IDR) plans to help borrowers pay down their federal student loan debt:

Saving on a Valuable Education (SAVE) Plan, which replaces the Revised Pay As You Earn (REPAYE) Plan
Pay As You Earn (PAYE)
Income-Contingent Repayment (ICR)
Income-Based Repayment (IBR)

It can take borrowers years or decades to pay off student loan debt in some cases. The average time to pay off student loans can range from 10 to 30 years for borrowers with federal student loans and five to 25 years for borrowers with private student loans.Some borrowers may never finish repaying a student loan during their lifetime. What happens to student loans when you die is the debt might be discharged, although some private lenders may demand repayment from your estate.Recommended: How Much Student Loan Debt Is Too Much?

Pros of Graduated Repayment Plans

Here are some of the advantages of graduated repayment plan student loans:

Your monthly payment starts off small
You know in advance that your monthly payment may increase over time
You can make extra payments toward principal without penalty

Cons of Graduated Repayment Plans

Here are some of the disadvantages of graduated repayment plan student loans:

Monthly payments can become harder to make over time
Any decreases in your annual income won’t decrease your monthly payment
Failing to make required monthly payments can lead to delinquency and default

Calculating Graduated Student Loan Payments

Graduated Repayment Plan payments on Direct Loans are calculated based on the borrower’s debt and student loan interest rates, according to the Code of Federal Regulations or CFR.If you’re a Direct Subsidized Loan borrower who selects the Graduated Repayment Plan, your monthly payment over a 10-year period may increase at least once. Your monthly payment may be less than $50 per month, and your highest required payment cannot be more than three times greater than your lowest monthly payment. If you start with a $40 monthly payment, your monthly payment may increase over time but may never exceed $120.The lowest possible monthly payment you can get on the federal government’s Graduated Repayment Plan is a temporary interest-only payment equal to the amount of interest that accrues each month. The definition of graduated repayment plans may include federal and private student loans that allow temporary interest-only payments before requiring the borrower to repay principal and interest.

The Takeaway

A graduated repayment plan for student loans can provide federal and private student loan borrowers with monthly repayments that start off small. Such plans can begin with interest-only payments before requiring the borrower to repay principal and interest. Borrowers in some cases may find it difficult to repay graduated repayment plan student loans once the monthly payment goes up.If you want to refinance student loans, Lantern by SoFi can help you compare student loan refinance options. Refinancing might be right for you if you can lock in a lower interest rate.Find and compare student loan refinance options with Lantern.

Frequently Asked Questions

How is the graduated repayment plan calculated?

What are four types of repayment plans for student loans?

What happens if you select a graduated repayment plan?

Photo credit: iStock/Igor Alecsander

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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.

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