Selecting a loan repayment plan is an important decision, and it is necessary that you make this selection after knowing the pros and cons of all repayment plans. The government of US allows the borrowers of student loans to repay the borrowed amount in small monthly payments over several years. The amount of monthly payments and the repayment term depends on the type of repayment plan.
Here is a list of repayment plans one can choose from to pay back their federal student loan.
- Standard repayment plan
- Pay-as-you-earn plan
- Income-sensitive plan
- Income-driven plan
- Graduated repayment plan
- Extended repayment plan
Graduated Repayment Plan
Graduated repayment plan offer you the flexibility to start paying back the principal amount in small monthly payments over two years. After two years of timely monthly payments, the amount is increased depending on the terms of repayment plan. In graduated repayment plan, the repayment term may extend over 10 to 30 years depending on the total amount borrowed and the type of student loan.
What Type of Student Loans are Eligible for Graduated Repayment Plan?
One can use a graduated repayment plan for the following types of student loans:
- FFEL PLUS loans
- Direct PLUS loans
- FFEL and Direct Consolidation loans
- Direct loans, both subsidized and unsubsidized
- Federal Stafford loans, both subsidized and unsubsidized
How does the Repayment Work?
With graduated repayment plan, repayment of the student loan starts with small monthly payments. For the first two years of repayment term, the monthly payments comprise of the interest charged on the principal amount only. After which, the amount of monthly payments is revised and the borrower pays an amount equal to standard monthly payments. These standard monthly payments contain a portion of principal amount borrowed and the interest charged on it.
For the first two years of repayment term, the monthly payment is equal to at least 25 percent of the standard payment or the interest charged on it, whichever is higher. When standard monthly payments start, the borrower cannot pay less than 50 percent or more than 150 percent of standard monthly payments.
The repayment term may extend over 10 to 30 years, depending on the type of loan. All federal direct student loans, except consolidation loans, are paid back over a period of 10 years. FFEL and direct consolidation loans have a repayment term of 30 years under graduated repayment plan.
What are the Benefits of Graduated Repayment Plan?
The graduated repayment plan is highly flexible. It allows you start loan repayment in very affordable, small monthly payments. It’s best suited for fresh graduated who don’t have a steady source of income. In addition to this, individuals who are facing financial difficulties but who anticipate a rise in their income in the coming years may also opt for this plan.
However, it is important to take this point into consideration that you are required to pay a higher interest amount under this plan. For the first two years, the monthly payments consist only of interest charged and therefore, are not counted towards loan repayment.