What is Graduated Repayment?

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By Mark Kantrowitz

July 5, 2020

Graduated repayment is a stepped repayment plan, where monthly student loan payments start off low and gradually increase over the repayment term in two or more steps.

The goal of graduated repayment is to have the monthly loan payments increase as the borrower’s income increases, but without directly tying the loan payments to income. Graduated repayment predates the income-driven repayment plans.

Graduated Repayment for Federal Student Loans

For federal student loans, graduated repayment starts off with low monthly loan payments that are barely above interest-only. The loan payments increase every two years.

The loan payments are always at least the new interest that accrues, so a graduated repayment plan will never be negatively amortized. The minimum loan payment amount is $25. 

Graduated repayment plans are subject to the three-times rule, which requires that no payment be more than three times any other payment. The first payment will usually be at least half of the monthly payment under standard repayment and the last payment will usually be less than one and a half times the standard repayment amount. 

The repayment term depends on the loan balance. The standard repayment term is 10 years. However, since October 7, 1998, borrowers who have $30,000 or more in federal student loan debt may use a 25-year repayment term. 

Borrowers who consolidate their student loans can qualify for other repayment terms based on the loan balance, as shown in this chart, similar to the repayment terms for extended repayment.

The increase in the monthly loan payments is based on a graduation factor, which is the percentage by which the monthly loan payment increases every two years. The graduation factor is lower with longer-term loans and higher with lower interest rates.

Because of the three-times rule, the graduation factor will never be more than 

where n is the number of years in the repayment term. For example, the graduation factor will never be more than 24.6% for a 10-year term, 20.1% for a 12-year term, 15.8% for a 15-year term, 11.6% for a 20-year term, 9.2% for a 25-year term and 7.6% for a 30-year term. Usually, the graduation factor is lower than these maximums. 

The increase in the monthly loan payment every two years will typically be in the range of $15 to $60. 

The graduation factor for $30,000 in debt at a 5% interest rate and 20-year repayment term is 5.75%. The loan payments start at $159.10 and increase to $263.09 by the end of the repayment term, with total payments of $43,422.12.

Graduated Repayment for Private Student Loans

A few private student loan programs offer a different kind of graduated repayment plan. Like the federal graduated repayment plan, these repayment plans start off with lower loan payments and increase the payments after a number of years.

But, these graduated repayment plans consist of just two steps: Interest-only payments for one to four years, followed by regularly amortized loan payments for the remainder of the repayment term.

For example, one lender provided a graduated repayment plan that consisted of four years of interest-only payments followed by 11 years of regularly amortized payments, identified as a 4/11 repayment plan. Another graduated repayment plan involves one year of interest-only payments, followed by level amortization for the rest of the repayment term. 

In a way, such graduated repayment plans are more similar to a partial forbearance than to the graduated repayment plans available for federal student loans. 

Problems with Graduated Repayment

Although graduated repayment can provide borrowers with financial relief immediately after graduation, when starting salaries are lower, there are a few problems with graduated repayment plans:

  • The borrower may pay more interest over the life of the loan under a graduated repayment plan than for an extended repayment plan over the same repayment term. For example, $40,000 in debt at 5% interest will yield a 25-year repayment term, with monthly payments of $212.13 to $273.14 and total payments of $72,057 under graduated repayment, compared with a monthly payment of $233.84 and total payments of $70,150 under extended repayment. 
  • The payments at the end of the repayment term can be much larger than the payments at the start of the repayment term, as much as three times larger. That may be harder to pay, especially if the borrower’s income hasn’t increased by much. So, even though you get financial relief at the beginning of the repayment term, you pay for it later. 
  • Progress in paying down the debt will be slower. Because the early payments are mostly being applied to interest, the principal balance will not decrease as quickly as it would under standard or extended repayment. 

Of course, borrowers always have the option of changing repayment plans on federal student loans. 

A good place to start:

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