Should I Lower My Student Loan Payments With An Extended Repayment Plan?

If you’re struggling to manage your student debt, you may have options to lower your monthly payments. Standard student loan repayment plans last 10 years. But borrowers with eligible federal loans might consider enrolling in an extended graduated repayment plan. This option extends your repayment period and initially lowers your monthly payments.

Just because you’ll have a lower monthly payment doesn’t mean it is right for you. Extended repayment plans may not be ideal for all borrowers because you’ll end up paying more overall. But this is one of several available options to consider when planning your loan repayment. To choose the best plan for you, you’ll need to weigh several factors such as your loan balances, income, and long term financial goals.

How Extended Graduated Repayment Plans Work

Enrolling your qualifying loan in an extended repayment plan lowers your monthly payment amount by stretching your repayment over 25 years. Eventually, you’ll make 300 total payments, instead of 120. Rather than consistent payments, on a graduated plan your minimum monthly payments start lower and increase every two years.

Not all student loans qualify and you must first determine if your loans are eligible. Borrowers who owe more than $30,000 in FFEL (Federal Family Education Loan) Program or direct loans qualify for enrollment. Direct loans are those made by the Department of Education directly to borrowers and FFEL loans are made by private lenders and guaranteed by the federal government. Importantly, to qualify your loan balance of $30,000 or more must be either Direct Loans or FFEL loans, and not a combination of the two types.

So even if you owe more than $30,000 in student loan debt, you’ll have to ensure your loans qualify. Qualifying loans include Direct Subsidized and Unsubsidized Federal Loans, Direct Consolidation Loans, FFEL Consolidation Loans and Plus Loans, among others. A detailed list of all eligible federal loans can be found on the Department of Education’s website.

Not all loans, such as Perkins loans, are eligible. Yet, you might consider consolidating these with a federal consolidation loan so that they become eligible for an extended repayment plan.

Once you determine your eligibility, make sure you fully understand the pros and cons before reaching a decision. Continue reading to understand how enrollment in an extended graduated repayment plan will affect your loan repayment:

Advantages of Graduated Repayment Plans

An extended graduated repayment plan may be a great option if you need to lower your monthly payments and your income disqualifies you for an income based repayment plan (IBR). Not only can you lower your monthly payment but you have options in structuring the payments:

• Graduated Repayment Plan (increasing payments over 10 years)

• Extended Repayment Plan (consistent payments extending 25 years)

• Graduated Extended Repayment Plan (increasing payments over 25 years)

You can select fixed monthly payments which remain the same for the life of the loan or you can choose to begin with a lower payment that increases as you earn more money later in your career. Lower monthly minimum payments allow you more flexibility and you can always choose to pay more each month. 

A ‘graduated repayment plan’ runs for 10 years, similar to a standard repayment plan, except the initial payments start lower and increase every two years. An ‘extended graduated repayment plan’ follows a similar path with payments increasing every two years, but the payments run for 25 years. As an alternative, you might choose an extended repayment plan with consistent monthly minimum payments for the full term. No matter which you choose, after making all of your minimum payments your loan balances will be paid in full. 

Other income driven options involve making minimum payments and the outstanding remainder of your loan is canceled but you have to pay taxes on the unpaid balance. Under a graduated repayment plan, you’re paying the loan in full so at the end of your payment plan you won’t have to worry about taxes on any balance. 

If you enroll your loans on a graduated repayment plan you’ll still be eligible for the same forbearance and deferment options available to all federal student loan borrowers. Notably, all federal student loans are currently in forbearance until at least September 30, 2021, due to the coronavirus pandemic. 

Disadvantages of Extended Graduated Repayment Plans

It's important to remember that on an extended repayment plan you’ll end up paying more interest. Enrollment in one of these plans is not a refinance of your loans. An extended graduated repayment plan will not lower your interest rate and interest still accrues on the principal balance. Because you’ll be paying your loans over an extended period your monthly payments may be lower but as interest accrues you’ll end up paying more over the life of the loan. 

Borrowers should also remember that payments made under an extended graduated repayment plan will not serve as qualifying payments for other income driven repayment plans. Payments will also not qualify for the public service loan forgiveness program (PSLF), even if you do work for a qualifying employer during that time. If you’re seeking loan forgiveness under the PSLF program, make sure to certify your employment and are making qualifying payments under a qualifying plan. 

Other Student Loan Plans To Consider

A graduated repayment plan might not be right for you. Before committing to a specific repayment plan you should explore all options. Even if you qualify for a graduated repayment plan other income based plans may be a better fit. 

Income Driven Plans

If your loans are either direct or FFEL loans you may qualify for an income driven repayment plan. These include: 

• Income-Based Repayment (IBR)

• Income-Contingent Repayment (ICR)

• Pay As You Earn (PAYE)

• Revised Pay as You Earn (REPAYE)

Your options may depend on the type of loan, outstanding balances, your employer, income or the date you borrowed the money. 

Under these plans you make payments equivalent to 10-15% of your discretionary income (calculated based on income, family size, and local poverty level). After making payments for 20 or 25 years the remaining balance is canceled. Though it's important to remember that any amount forgiven will be taxable as income - meaning if at the end of your repayment term you have a remaining balance of $25,000 that is forgiven, you may have to pay income taxes on that amount when you file your annual tax return. 

Public Service Loan Forgiveness

If you work for a government, non-profit, school district, or other qualifying employers you may be able to have your loans discharged under the Public Service Loan Forgiveness (PSLF) program. This forgiveness option is available if you work for a public or non-profit employer and make qualifying income based payments for 10 years. 

Besides a shorter repayment term, this option also provides that any remaining balance forgiven under the PSLF program is not taxable as income, unlike alternate IBR plans. Under an IBR plan you might not pay off the entire loan balance, as payments are completely contingent on your income. But to remain eligible these plans require that borrowers provide annual income certification and in the case of the PSLF program, employment verification. Even if you’re submitting monthly student loan payments timely, you’ll need to continue providing all required annual certifications to your loan servicer. 

Let’s Summarize…

An extended graduated repayment plan will lower your monthly payment. That may provide you the immediate relief you need from high minimum payments. Though an extended plan isn’t ideal for everyone because you’ll end up paying more in interest on the loan. 

You may also have more fitting alternatives under one of the Income-Driven Repayment plans and if you’re just looking to briefly pause your payments you might request a short forbearance or deferment. Keep in mind though, forbearance and deferment are short term solutions. 

Extended graduated repayment plans are just one of several plans and you should work with your loan servicer to discover which works best for you. You can also use the Department of Education’s loan simulator to help determine your eligibility and understand the effect of each repayment plan.