What is Graduated Repayment Plan for Student Loans?

It isn’t always that easy to pay for books, tuition fee and living expenses when you are thinking of higher education in the United States. That’s when student loans come to our rescue. A student loan is specifically designed for students to pay for their education expenses and carry substantially lower interest rates and suitable repayment schedules to help students pay them back when they are capable of. Student loans are different from scholarships and grants and are supposed to be paid off.

 There are mainly two types of student loans. Federal student loans are funded by the federal government. Interest rates on a federal loan are fixed and in some cases, tax deductible. Other than government agencies; banks and finance companies also offer student loans. Interest rates on private student loans are generally variable and higher than federal student loans. The need to pay off a student loan sometimes acts as a discouragement to the students who require student debt. 

To overcome this problem, policy makers have made constant amendments to the education law and tried to make it easier for the students to pay back their student debts. One such way is Student loan forgiveness programs. A student loan forgiveness programme is designed to help students pay full or a part of their student loan and in exchange require the student to pursue a particular occupation or volunteering service in exchange of paying off the loan completely or in part. In the US, student loan forgiveness programs are also aimed at directing individuals towards sectors of national importance where there is lack of qualified personnel.

The US Department of Education offers forgiveness on federal student loans and once forgiven, the student is not liable to pay his remaining loan balance. As a matter of fact, student loan forgiveness programs are also not available to all borrowers. That is when various student debt repayment plans help an individual in paying off a student debt. These plans correspond with the financial needs and conditions of the borrower and assist him/ her to pay off a loan rather than defaulting one. One such plan is Graduated Repayment Plan.

Graduated Repayment Plan 

Graduated repayment plan demands a lower monthly payment in the initial years and increases the repayment amount in every two years up till ten years for all loans except in the case of direct consolidation loans and Federal family Education loan consolidation loan. The monthly payment is never less than the interest amount that accumulates between the borrowers’ payment and is never greater than three times more any other payment. Monthly payment to be made towards debt under this plan can be calculated by using the Standard Repayment Calculator.

For a student debt of, suppose, $10,000 carrying interest rate of 5%, a borrower would be making 120 monthly qualifying payment of $106 with a total interest payment of $2,728.72. This calculator can be used by a borrower before deciding for which repayment plan to choose from. Except for Direct consolidation loan and FFEL consolidation loans, the monthly payment made towards debt under this plan is to be made for ten years. The repayment period varies for a consolidated loan from ten to thirty years depending on the amount of consolidated student debt.

Eligibility for Graduated repayment plan

A student with Direct Unsubsidized or Subsidized Federal student loan, direct consolidation loan, Direct PLUS loan, Unsubsidized and Subsidized Federal Stafford loans, Federal Family Education Loans Program PLUS or consolidated loan is eligible for standard repayment plan of repayment. Income- contingent repayment plan does not demand any initial income eligibility specifications. 

Benefits and Limitations of Graduated repayment plan

Graduated repayment plan allows a borrower to make a lower monthly payment towards debt and increases the loan amount only timely, which corresponds to an expected rise in the income level. By lowering the monthly payment, the plan allows the borrower to have a better control over his finances, at least in the beginning of his earning years. Also, an individual can realize some savings and benefit from them overtime. The only major disadvantage that this repayment plan contains is that the total amount of repayment made during the lifetime of debt is more as compared to a standard loan repayment plan. Due to increase in monthly repayment amount as against a fixed amount in standard loan repayment, this repayment option offers facility of reduced monthly payment but at the same time increases the aggregate payment made towards debt.

Conclusion

Student loan forgiveness programmes have been an eminent feature of undergraduate and graduate studies in the US economy since 1950s, with its horizons been further broadened with the passing of time and growing importance of education. With the growing importance of student loans, policy makers and economists have realized the importance of making loan repayment easy for the borrowers for the overall benefit of the economy. As a result, these repayment options offer a series of benefits, only waiting to be availed by the right use of knowledge and hard work. Also, a borrower also has an option to switch to another student debt repayment plan in case he finds himself unable to pay for monthly loan repayment under a particular repayment plan.