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Updated
Graduated Repayment Plan | Student loan refinancing | |
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Best for when … | You’re initially launching your career and can’t afford the Standard Repayment Plan. | You’ve established your career and have excellent credit. |
How it works | Make repayments that increase every two years over a 10-year term. | Take out a new loan with different rates and terms. |
Pros |
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Cons |
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The Graduated Repayment Plan works by giving you repayments that start off low and increase every two years over a 10-year term. This plan is best for borrowers with a low student debt load because the increases are less dramatic.
If you’ve consolidated your federal loans with a Direct Consolidation Loan, you can stretch this out over 30 years. While this makes repayments less dramatic, you’ll pay much more in interest.
You might want to consider the Graduated Repayment Plan in the following situations:
Student loan refinancing works by taking out another loan from a private company to pay off your current loan. You end up with an entirely different loan, along with new rates, terms and benefits. What you qualify for depends on factors like your credit history and income. You can apply with a cosigner if you don’t qualify on your own, though you often still need to have good credit.
You might be able to qualify for a lower interest rate if you’ve built up your credit and are settled in your career. But you’ll lose all of the benefits that come with federal loans, such as a wide range of deferment options and eligibility for some forgiveness programs.
If you’re still not sure which is right for you, lets’ take a look at an example of how the Graduated Repayment Plan and refinancing might work:
You have a student loan balance of $41,570 at an interest rate of 6%. You qualify to refinance for a 15-year term at a 3.9% APR.
Here’s how the two options compare:
Graduated Repayment Plan | Refinancing | |
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First monthly repayment | $263 | $305.41 |
Last monthly repayment | $790 | $305.41 |
Total interest paid | $17,362 | $13,403.67 |
In this example, refinancing might be a better option from a cost perspective. While it costs a little more in the beginning, you’d end up paying more than twice per month by the last year and more in interest if you stuck with the Graduated Repayment Plan.
Which option is best for you depends on how you think the next 10 years of your career will play out. If you’re fairly certain you’re going to stay in the same job with a similar salary, refinancing might be the way to go. But if you’re just starting out or think you might want to switch careers, keeping your loans federal gives you more flexibility.
You can learn more about how it all works by checking out our guide to student loan repayment plans.
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