Once upon a time, the graduated and extended repayment plans were the best options available for many borrowers.
Today, they are dinosaurs compared to the new and improved federal repayment plans, and continuing to pay for your student loans under these two old plans could unnecessarily cost you thousands of dollars.
Graduated and Extended Plan Benefits
In theory, both the extended and graduated repayment plans have their perks.
The extended repayment plan gives you far more time to pay off your loans than the standard repayment plan.
The graduated repayment plan allows borrowers to pay less now and then pay more in the future when they will hopefully be making more money.
While these plans sound nice, and have served many people for years, the creation of newer and better repayment plans has made these old plans a relic of little value to most. The difference is all in the fine print.
Improved Alternatives
The newer and better plans are the income-driven repayment (IDR) plans.
While the extended and graduated repayment plans attempt to alter your payments to numbers you can afford, the IDR plans ensure that you don’t ever have to pay more than 10% of your income to federal student loans.
For many, they pay a much smaller portion, even as little as $0 per month (for those at or below 150% of the poverty level income).
Additionally, some income-driven plans offer a subsidy to cover a portion of the interest charged each month. This assistance can make a huge difference in debt elimination.
Income-Driven Repayment Can Mean Student Loan Forgiveness
In addition to the lower payments required by IDR plans like IBR and PAYE, they also qualify for two types of student loan forgiveness.
The first type is public service forgiveness. If you make payments on time for 10 years, and have certified public service employment, the remaining balance on your student loans is forgiven. If you were on the extended or graduated repayment plans, and were working the same job, but paying even more each month, you would not qualify for student loan forgiveness.
The second type of forgiveness happens after 20 years on PAYE or 25 years of IBR. Anyone qualifies for the second type of forgiveness, regardless of what job you work or how much you pay. (FYI: for this second type of forgiveness, the debt forgiven may be taxed in the future). Compare this perk to the extended repayment plan… which can last up to 30 years! If you were on the PAYE plan, you could only pay a portion of your debt and have the remainder forgiven after 20 years. On the extended payment plan, you could end up paying the full amount plus interest over the course of 30 years.
When is a graduated or extended repayment plan a good idea?
Borrowers should only enroll in the extended or graduate repayment plan if they will definitely be paying off their loan in full.
If a borrower is certain that they will pay back the full balance of their debt, then the forgiveness programs no longer matter. However, if there is a chance that they will not be able to pay off the loan in the future, keeping student loan forgiveness as an option is the preferred route.
Additionally, if borrowers are looking for the lowest possible payment as part of an aggressive repayment strategy, then a graduated or extended repayment plan might make sense. In this instance, the graduated or extended repayment plan is a temporary measure to pay off high-interest debt.
Final Thoughts
Ultimately, every student loan situation is different.
Despite their shortcomings, it is possible that the graduated or extended repayment plans are the best options for some people.
However, the small differences in the fine print can make a huge difference, so it is critical to be informed of all the options out there. The wrong choice could cost thousands.
Enrolling in a Better Plan
Borrowers interested in signing up for an Income-Driven Repayment plan can submit their request on the studentaid.gov website.
You ignore the fact that the forgiving student loan debt becomes taxable income.
Actually, the forgiven student debt is NOT taxed for public service forgiveness… the tax only applies to the standard 20 and 25 year forgiveness.
I agree that we have to be informed of all the options out there before we decided which option to take. I think IBR and PAYE could be a better choice for most people, especially with the possibility of loan forgiveness.