What is a Student Loan Grace Period?
Most student loans come with a grace period during which you don’t have to make payments. If you’re smart, however, you’ll use some tips and tricks to maximize your savings on your student loan repayment—and minimize your debt.
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The average college student graduates with almost $28,000 in student loan debt. Those loans may be federal or private and eventually require repayment after graduation. If you’ve just spent the past few years of your life studying and are just entering your new career, chances are good that you won’t be making a huge salary—and that can make things difficult as those student loans move into repayment status.
For most student loans, there’s a grace period of six to nine months. During that time, you don’t need to make any payments on your student loans. The purpose of the grace period is to give you time to graduate, find a job, and start making a salary.
For most graduates, the period of time right after they finish school is pretty chaotic and even worrisome; they may not have a job yet, or they may find that they’re not making enough to handle their student loan payments. That grace period helps newly minted graduates get settled in their new careers and prepare for the repayment period.
How long your student loan grace period is, however, depends on the type of student loan you have. It’s important to understand what you borrowed so you’ll also understand when you need to start making repayments. Being prepared can help ensure you make on-time payments and work toward establishing or maintaining good credit.
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Federal Student Loan Grace Periods
There are two major kinds of federal loans: Direct (or Stafford) loans and Perkins loans. The Stafford loans come with a six-month grace period. If you have a federal Perkins loan, you are given a nine-month grace period. In addition, a Perkins loan also typically offers another six-month grace period after a deferment.
If you’re a graduate student with a PLUS loan, it’s a bit different; instead of the six- or nine-month grace period, you have about a 60-day interim period. Many graduate students are already employed and moving along in their careers, so they don’t necessarily need the longer period of time after graduation to find a job and get settled.
For Parent Plus Loans, there is generally not a grace period; repayment usually begins after the loan is disbursed. However, there is a repayment option that allows you to apply for a deferment period while the student is in school and for six months after the student graduates, leaves school, or drops below half-time enrollment.
The trick to understanding federal student loan grace periods is knowing that the grace period doesn’t necessarily start when you graduate, but when you drop below half-time enrollment. For most students, that means graduation—for others, however, it may not.
Student loan borrowers who take an internship during the school year, take a year off from classes, or otherwise drop below half-time will see their loans go into a grace period. If they get additional student loans after that, those new loans might not kick into grace period status until graduation, even if the older loans are already now in repayment. Only one grace period is allowed per loan.
Private Student Loan Grace Periods
Private loans are offered by private lenders instead of the U.S. Department of Education; as such, they make their own rules within the confines of the law. While some lenders allow for you to pay only interest while you’re in school or offer a grace period after graduation, many do not; those loans go immediately into repayment status even if you’re still in school. Failing to make your monthly payments on time can damage your credit score, so it’s important to understand the repayment schedule for all of your loans.
You need to check with any private lenders you’ve borrowed from to see what their specific policies are. If you don’t have a grace period, you might be able to restructure your loan, such as through consolidation or refinance, in a way that gives you some time to prepare for repayment.
Managing Your Student Loan Debt
The grace period is an excellent time to get started on the right foot with your financial health. There are several things you can do to make sure that when your grace period is over, you can handle your monthly payments.
Understand Your Debt
To pay back your debt effectively, you need to know what you owe—and how you spend your money. Learning how to budget is a critical skill, and now is the perfect time to learn it. Track your spending; find out those places where you might be careless or overly free with your money. Plan for your student loan payments and understand where you may need to reduce or even cut spending in other areas.
Create Timelines for Your Loans
Using a debt reduction spreadsheet or other timeline is a great way to visualize all of your loans in one place if you have them spread over different lenders. You can model different scenarios, such as paying a little extra each month.
Communicate With Your Loan Servicer
Even if you don’t need to start making payments for several months, the time to start communicating with your lender or student loan servicer is now. Your lender may not be the company servicing your loan, so make sure you know where your payments need to be sent and where you can go for customer service.
Make sure that your information is updated so you receive any mail or phone calls related to your account. If you have questions, ask them during this time. That will save you time and effort later.
Make Interest Payments
Even when you’re not in repayment, if you have a Direct unsubsidized loan, you’re still accruing interest that will be compounded onto your balance after your grace period is over. That extra amount will then start accruing interest as well, costing you exponentially growing amounts of money as time goes on.
If you can afford to pay the interest during your grace period, it’s an excellent idea to do so. Some Direct subsidized loans that were disbursed during a certain time period might accrue interest during the grace period, so be sure to check with your lender or student loan servicer.
Pay Off Your Loans as Early as Possible
Just because you’re on a repayment plan with a 10-year loan term doesn’t mean you should take the full time to pay off your loans. In fact, it’s financially smart to pay off student loans early. The longer you take to pay them in full, the more money you’ll end up paying.
Pay Off High-Interest Loans First
As you’re looking at your loans, take special note of the ones with the highest interest rates first. Those are the ones that will be the most expensive over time; if you have extra money to put toward your loans, pay those off first.
>> Read More: Which Student Loans to Pay Off First
Once those are gone, try and keep the same amount per month going to the next highest rate. You’ll end up paying your student loans off much faster—and pay less while doing it.
Apply for an Income-Driven Repayment Plan if You Need It
If you know that you won’t yet be able to afford your monthly federal student loan payments once they are due, consider applying for an income-driven repayment plan. Check to see if you’re eligible for any of the following repayment options: Revised Pay As You Earn Repayment Plan (REPAYE Plan), Pay As You Earn Repayment Plan (PAYE Plan), Income-Based Repayment Plan (IBR Plan), Income-Contingent Repayment Plan (ICR Plan).
StudentAid.gov recommends applying for these programs at least two months before your grace period ends to allow time for processing before your repayment begins.
Author: Dave Rathmanner