These two are being lumped together as an extension of the standard plan I talked about last week. They’re really not so different, except that you get longer to pay them off, which increases your interest.
The biggest difference between this plan and the standard plan is that your student loan payments start out lower, and gradually increase over the life of the loan. If you have a ten-year loan, the monthly payment will start out at a price that at least keeps up with the interest accruing, and then rises every two years until the 10 year term is up. You may also qualify for longer-term repayments, if you have loans above $60,000. If you are in a career where you know your income is going up by a certain amount, this may not be a bad idea.
Extended Plans simply take your normal plan (standard or graduated) and extend it for 20, 25, or 30 years. This may help if you find yourself in a bind and unable to keep up with the 10 year plan payments. However, keep in mind that you will likely pay more in interest if you extend the repayment timeline.
Graduated plans last for 10 years (120 payments). If you have a consolidated loan, or loans over $60,000 you may qualify for repayment terms of up to 30 years.
Your payments will be enough to at least keep up with the interest accruing each month (right now for me, that’s around $1,300). Since I’m a few years into repayment already, according to my loan servicer, my minimums are in the $2,000 range already, so I’ve already received my first step-up in minimums. These increases occur automatically, without regard to any increases in income (or lack of increase).
Additional payments (payments over the minimum, or payments in addition to your minimum payment) are applied first to any outstanding interest, then to principle. Unfortunately, when in federal loan territory, there doesn’t seem to be a way to apply extra payments directly to principle before you’ve paid down the interest, so you just have to suck it up and pay down any interest and then go into hitting the principle.
Interest compounds daily and is capitalized monthly. In this way, you can calculate your interest just like you would with a credit card or a car payment.
There is currently no forgiveness plan for anyone on a graduated or extended plan. You will be required to pay off all principal and interest.
Real World Example
According to the government’s nifty calculator, my payments would have started at around $1,600 a month (three years ago), and will end at about $5,000 a month. We will have paid about $379,000 on my debts alone. Considering we’re planning on $469,000 (which includes the spouse’s loans) this doesn’t seem too far off of what we’re doing. We’ve just increased payments on my loans faster – right now we’re at $2,800 per month just on mine, and hoping to get to $3,300 pretty soon. As our income rises, we should be keeping up with the graduated plan pretty well.