Graduated and Extended Repayment Plans – Useless Relics

Michael Lux Blog, Student Loans 3 Comments

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.

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.

The newer and better plans are the income based repayment (IBR) plan and the pay as you earn (PAYE) repayment plan.  While the extended and graduated repayment plans attempt to alter your payments to numbers you can afford, the IBR and PAYEensure that you don’t ever have to pay more than 15% 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 poverty level income).

In addition to the more reasonable payments required by IBR and PAYE, they also qualify for two types of student loan forgiveness.  The first type that IBR and PAYE qualify for 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 is taxed).  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.

Ultimately, every student loan situation is different.  Despite their shortcomings it is possible that the graduated or extended repayment plans are the best option 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.

  • 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.

  • Kevin

    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.