After college, many people are forced to take lower-income jobs, often as a stepping-stone to a better-paying position.  If this sounds familiar, the graduated repayment plan could make paying back your federal student loans a little less stressful.  This program is available for several types of Direct and Federal Family Education Loan (FFEL) program loans, including:

• Subsidized and Unsubsidized Direct Loans
• Direct PLUS Loans
• Direct Consolidation Loans
• Subsidized and Unsubsidized Federal Stafford Loans
• FFEL PLUS Loans
• FFEL Consolidation Loans

Your monthly payments are graduated, meaning they will start out small and increase throughout the repayment period, usually every two years.  The repayment period can last as long as ten years or a total of 120 monthly payments.  Each payment will be at least equal to the amount of interest that collects between payments, and your highest payments will be no more than triple the amount of your smallest payments.

If you can afford it, making prepayments can reduce the overall cost of your loan.  When payments on a graduated repayment plan are calculated, they take into account how much remains on your loan, so you might even be able to lower your monthly payments toward the end of your loan.  There are no prepayment fees for federal student loans, so even small repayment amounts can make a difference.  Be sure to tell your lender that you want your prepayment applied to the principal of your loan, or else they may interpret it as an early payment and simply delay your next bill.  You can find your lender’s information using the National Student Loan Data System.

To give you an idea of how the graduated repayment method works, let’s pretend you took out a loan for $31,500 with an interest rate of 5.5% and a repayment period of 120 payments.  For the first two years, your monthly payments will be about $230.  As you continue to make payments, more of your money will go toward reducing principal instead of paying off interest – for your first payment of $230, about $144 of that is interest, but for your last payment of $230, only $135 will be interest.  During the last two years of the repayment period, your monthly payments will be around $513.  Over the course of repayment, you will pay about $11,357 in interest, bringing the total cost of the loan to $42,857.

Assuming the same loan information, here’s what you would pay if you chose a different repayment plan:

• A standard repayment plan with 120 fixed payments would give you monthly payments of about $342, for a total cost of $41,023, with $9,523 being interest.
• An extended repayment plan with 300 fixed payments would give you monthly payments of about $193, for a total cost of $58,031, with $26,531 being interest.
• An extended repayment plan with 300 graduated payments would start you off with monthly payments of about $144 and end with payments around $302.  The total cost for this plan would be $63,277, with $31,777 being interest.

The graduated repayment plan is a great solution for people who are making less money when they begin repaying their loans but expect to make higher wages fairly soon.  Since your payments are partially based on how much of the loan remains to be paid off, making prepayments can help make your future payments smaller – even if you’re only prepaying an extra few dollars each month.  The USA Funds Student Loan Repayment Calculator can give you insight into how different repayment methods will ultimately affect the cost of your loans.

Remember that you can change repayment plans once per year, and if you experience financial problems, talk to your lender.  Not making payments can cause your loan to default, which will negatively affect your credit score for years to come.