What to Know about Your Student Loan Grace Period

What to Know about Your Student Loan Grace Period

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Note: This post was submitted to Student Caffé by Marianne Hayes. Marianne is a longtime freelance writer and content marketing specialist. Since earning her degree in journalism and creative writing from the University of Central Florida, her work has been published in Cosmopolitan, Redbook, Good Housekeeping, Forbes, Yoga Journal, and more. We would like to thank her for her submission and credit her as the author of this blog post.

Crossing the college finish line is no small feat. Unfortunately, 69% of 2018 grads are on the hook for student loans, with the average borrower owing a whopping $29,800.

Now for a bright spot: There's a good chance you won't have to start making payments right away. Most federal student loans (and some private ones), give borrowers a few months to catch their breath before their first bill comes due.

It's called the grace period—here's everything you need to know about making the most of it.

How long do student loan grace periods last?

It all depends on the type of loan you have. Public loans (i.e., loans that are backed by the federal government) generally grant you a six-month grace period, though the grace period for Perkins loans goes up to nine months. The exception here are PLUS loans, which are lent to parents, graduate students, and professional students; these offer no grace period. The good news is that folks in this camp can request a deferment in its place—this is when the loan servicer allows you to temporarily push pause on your payments.

As for private loans, it varies from lender to lender. The only way to get clear on your responsibilities is to reach out to your individual loan servicers.

Does interest add up during the grace period?

Interest accrues during the grace period for the majority of federal loans, except direct subsidized loans. For private loans, it all depends on the individual lender. The kicker is that interest also capitalizes once your grace period comes to an end. Translation: Once it's over, all of that accumulated interest is then tacked onto your principal loan balance.

"That's a real clear reason why many students are surprised when they graduate to see a larger amount due than the original amount they borrowed," said Andrew Pentis, a certified student loan counselor and student loan expert with Student Loan Hero.

It also means that from that point forward, you'll be paying interest on all that unpaid interest. (Aren't student loans fun?)

Your grace period to-do list:

It's not all bad news. Your grace period is a great opportunity to get your finances in order and make a plan of attack for paying off your student loans. Pentis says the first order of business is clarifying how much you owe and to whom. This begins with contacting all your loan servicers to clarify:

  • Your principal balance
  • When your first payment is due (Is there a grace period? If so, how long is it and is interest accruing during this time?)
  • Your repayment plan and monthly payment

(You can also look up your federal loan details and update your contact information via the National Student Loan Data System.)

Unless you opt for something different, federal loans automatically default to a 10-year repayment plan. Just keep in mind that a longer repayment period ultimately means shelling out more in interest over the life of the loan. A shorter repayment term, on the other hand, works out to higher monthly payments, but you'll get debt-free more quickly and pay less over the long haul. Of course, you have to go where your budget takes you. If you're fresh out of school and money is tight, the standard repayment plan may be your best bet.

Either way, you certainly don't have to wait for your grace period to expire to save money. If you're financially able, Pentis says making interest-only payments during your grace period will keep capitalized interest off your back. Let's say you owe $23,000 with a 6% interest rate. If you make no payments during your six-month grace period, you'll rack up an additional $688.

Refinancing during your grace period is another option. This just means taking out a new, lower-rate private loan to pay off all your balances. From there, you'll have one new balance and monthly payment. Every refinancing lender has different eligibility requirements. Pentis says approval is usually contingent upon your ability to prove you have a steady income and solid credit history, among other things.

Piggybacking on a cosigner can help you get approved, but refinancing also means saying so long to the federal protections that come with federal loans. This includes deferment and forbearance options, the ability to make income-based payments, and access to federal loan forgiveness programs. In other words, consider the trade-offs before pulling the trigger on a refinanced loan.

What to do if you need help making your payments:

While getting your finances situated during your grace period, you may find your upcoming monthly payment tough to swallow, especially if you've got an entry-level salary or are unemployed. The silver lining for federal loan borrowers is that there are a number of programs out there to help ease the burden.

Deferment allows you to suspend your payments for up to three years without falling into bad standing. Interest may still accrue—and it'll capitalize once deferment ends—but it might be your best bet if you're stuck between a rock and a hard place. Similarly, forbearance can lower or eliminate your monthly payment for up to 12 months if you've stumbled on financial hard times or meet other qualifying criteria. You can also consider opting into an income-driven repayment plan. This is ideal for federal loan borrowers whose student debt is disproportionately eating into their annual income.

"I think borrowers should look at their grace period as an opportunity," said Pentis. "Often times, they make the mistake of seeing it as a last break before reality hits, instead of a chance to get a head start on attacking their debt."

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