Graduated Balance-Driven Plans

If you recall from Part 1, repayment options on federal loans are split into two categories: income-driven plans and balance-driven plans.  Balance-driven plans are the type where your monthly payment depends on how much you owe.  In Part 1, we talked about one kind of balance-driven plans — standard fixed plans where you pay the same amount for the term of the repayment plan.  For instance, you make the same payment every month for 10 years.  At the end of 10 years your loan is paid off.  Today we’ll talk about the other kind of balance-driven repayment plan, graduated plans. 

Under graduated plans, the amount you pay begins lower than under a standard plan, but increases every two years until it ends up higher than under the standard plan.  In the end you pay off the loan over the same number of years, but in the beginning you have lower payments.  Because the payments start off so low, you will end up paying more over the life of the loan than under a standard repayment plan. 
 
As with standard, fixed plans, there are 10-year and 25-year graduated plans for most federal loans.  For consolidated loans, the term depends on the amount you’ve taken out.  For consolidated borrowers whose loans entered repayment on or after July 1, 2006 the term of the graduated plans are as follows, 
  • If you owe less than $7,500, you may repay on a graduated 10-year plan
  • If you owe between $7,500 and $10,000, you may repay on a graduated 12-year plan
  • If you owe between $10,000 and $20,000, you may repay on a graduated 15-year plan
  • If you owe between $20,000 and $40,000, you may repay on a graduated 20-year plan
  • If you owe between $40,000 and $60,000, you may repay on a graduated 25-year plan
  • If you owe more than $60,000, you may repay on a graduated 30-year plan.
 
So, how much will your repayment be under a graduated plan?  We can’t know for sure until you apply through your servicer.  The formulas for calculating the graduated plans are not publicly available.  You can use the federal repayment estimator to get an estimate.  There is no guarantee that your servicer will match these numbers, however.  (Fun fact: I once e-mailed somebody who had done a lot of student loan calculator work, and he said that the formulas were not public but that he used the “Newton Raphson Method” to make his own estimates.  Personally I don’t think you should need to know advance combinatorics to determine your anticipated loan repayment, but that’s just me) 
 
According to the repayment estimator, if you have $100,000 in eligible student loan debt at 6% interest, a graduated 10-year plan will start at $635/month.  You will pay $635/month for the first two years, but every two years will increase until in the end you pay $1905/month.  You will pay $142,000 over the life of the loan under this plan.  
 
By comparison, a standard fixed 10-year plan would cost $1,110/month and you would pay $133,000 over the life of the loan. 
 
If you did an extended graduated plan, you would start at $500/month and get up to $970 at the end of the 25-year term.  In the end you would pay $210,000 to repay the same $100,000 student loan debt under this plan.  By comparison, a standard fixed 25-year plan would cost $644/month and cost $193,000 over the life of the loan. 
 
Graduated plans can be costly.  However, if you make too much to benefit from income-driven repayment plans, or if your loans do not qualify for an income-driven repayment plan, the extended graduated plan will start you at the lowest amount possible.  

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