When you graduate college or drop below half-time enrollment, many of your student loans will enter a temporary grace period prior to going into repayment. This means you have a certain amount of time to get on your feet and get your finances in order before you need to start making payments.
Instead of using this period of time to set the idea of your student loans aside and not think about them, the grace period provides an opportunity to make financial decisions that leave you prepared to take on your student loan debt with ease.
This article explains what a student loan grace period is, which loans have grace periods, and what the top seven things are that you should do during the grace period.
What Is a Student Loan Grace Period?
In a nutshell, a student loan grace period is a specific amount of time you are given before you have to start making loan repayments. Usually, it’s after you graduate, leave school, or drop below half-time enrollment.
Grace periods can vary for different types of loans, but in summary:
- Federal Direct Subsidized Loans: six-month grace period, no interest accrues during the grace period
- Federal Direct Unsubsidized Loans: six-month grace period, interest accrues during the grace period
- Federal Direct Parent PLUS Loans: no grace period, and repayment begins upon dispersal
- Federal Direct Graduate PLUS Loans: six-month grace period, interest accrues during the grace period
- Private student loans: grace period varies depending on the lender
The grace period allows you time to get your finances in order, get established in a new job, and generally get yourself in a good place where you can make loan payments without difficulty. There are several things you can do during this period in order to maximize your financial well being.
1. Assess Your Loan Landscape
One of the first things to do during the grace period is to assess what your total student loan burden is. Make an accounting of all of your loans, including the loan type, amount, and lender. This allows you to better understand the financial picture before you.
If you have private student loans, it’s possible they may not have a grace period, and you should be aware and prepared to begin those payments.
Once you have lists of all of your loans, you can estimate what your payments will be. In fact, you can contact your loan servicers and find out exact numbers ahead of time so that you can be even better prepared. (Loan servicers are the companies responsible for collecting your payments and managing your loans. Information on finding your student loan servicer can be found on the Federal Student Aid website.)
Once you understand your total debt balance and what you will be able to expect as far as future monthly payments, you can better prepare yourself for what happens after the grace period ends.
2. Prepare Financially for Repayment
When you leave school, your finances may take a while to reach an equilibrium, especially if you are still in search of a job. Once you have stable employment and a predictable income, you can start to sort out your monthly budget.
If you’ve determined what to expect from your monthly loan payments when they begin, you can begin preparing to have that amount set aside. This is also a time to assess if you may not be financially prepared.
If your forthcoming loan payments do not fit into your budget, you have some time to either determine alternative payment options or find additional or alternative employment.
3. Change Your Repayment Plan
If you have federal student loans, there are many different repayment plan options. You will be put on the Standard Repayment Plan unless you contact your servicer to make arrangements otherwise.
The Standard Repayment Plan pays off your federal student loans in 10 years with equal monthly payments. It is one of the ways to pay your loans off most quickly while paying the lowest interest.
However, if you find that your current budget does not support the ability to make those payments, you can contact your loan servicer and make arrangements for a different plan. Payment plan options offered by the U.S. Department of Education include:
- Standard Repayment Plan: This consists of fixed monthly payments for 10 years
- Graduated Repayment Plan: Payments begin lower and then increase, usually every two years, in such a way that allows the loan to be paid off in 10 years.
- Extended Repayment Plan: Payments may be fixed or graduated, but the repayment period is extended to 25 years, lowering the monthly payment.
- Pay As You Earn (PAYE) Plan: Monthly payments are 10% of your discretionary income but never more than the Standard Repayment Plan payments. Payment amounts are adjusted every year based on financial data. Any amount not paid off in 20 years is forgiven.
- Revised Pay As You Earn (REPAYE) Plan: Similar to PAYE, except undergraduate loan balance is forgiven after 20 years, and graduate loan balance after 25 years.
- Income-Based Repayment Plan: Monthly payments are 10% to 15% of your discretionary income, and the remaining loan balance is forgiven after 20 or 25 years, depending upon when you received your first loans.
- Income-Contingent Repayment Plan: Monthly payment is the lesser of 20% of your discretionary income or the amount you would pay on a fixed 12-year payment plan. Outstanding balance is forgiven if not paid in full after 25 years.
- Income-Sensitive Repayment Plan: Monthly payment is based on annual income, but loan balance is paid in full in 15 years.
Visit the Federal Student Aid website to explore each of these options in more detail and to see which of them you might qualify for.
If you have private student loans and find the payments are going to be untenable, you can contact the servicers of those loans as well. While private loans are generally less flexible with repayment options, they are often willing to work with you.
4. Investigate Student Loan Forgiveness Programs
One thing to do during the grace period is to look into options that might allow you to get out of paying some of your outstanding loan balance.
The Public Student Loan Forgiveness Program forgives the remaining balance on your Direct Loans after you make 120 qualifying monthly payments under a qualifying repayment plan while working full time for a qualifying employer. This requires you to be employed by a U.S. federal, state, local, or tribal government, or nonprofit agency and use an Income-Driven Repayment Plan.
The Teacher Loan Forgiveness Program allows those who teach full-time for five consecutive years at a low-income school to be eligible for up to $17,500 in loan forgiveness.
If you qualify for a forgiveness program, it is in your best interest not to pay extra, not to pay early, and not to go with the default Standard Repayment Plan.
5. Consider Paying Interest
With the exception of Federal Direct Subsidized Loans, all loans continue to gain interest during the grace period. That interest, if unpaid, becomes capitalized, which means it is added to the loan’s principal balance. After that happens, the interest itself gains interest.
Because of this, many people chose to make interest-only payments while in school or during their grace period if they are able. By avoiding capitalization, you prevent your principal balance from growing and lessen the total amount you will pay in the end.
6. Start Making Payments Early
Unless you expect to qualify for a loan forgiveness program as described in item 4 in this list, the earlier you are able to begin repaying your student loans, the less you will have to pay in total.
Unsubsidized loans gain interest from the moment they are disbursed, so this amount will keep growing until payment begins. The sooner you pay off these loans, the less total interest you will end up paying.
You should also consider making payments on subsidized loans during the grace period. While these loans are not gaining interest during this time, you can pay down the principal so that when the grace period ends, the total interest that will begin accruing will be less.
Do not fret, however, if you are unable to begin paying sooner than the end of the grace period. After all, this period exists for a reason.
7. Determine if Consolidation Is Right for You, and Time It Right
Often you can get better loan terms or interest rates by consolidating multiple federal loans into one. This can be done during the grace period, but keep in mind that doing so will cause your grace period to end early. If you are ready to begin paying and have mostly unsubsidized loans, this is probably fine.
If, however, you have subsidized loans, then consolidating before the grace period ends will shorten the period of time when your loan would continue not to gain interest. Also, if you aren’t yet ready to begin payments, it is probably best to hold off on the consolidation. You can still take the time spent in grace to sort out the details of consolidation, and just time it for the end.
Plan for Repayment Intelligently
The essence of the grace period is to give you some breathing room before loan repayments are due. Using this time wisely can mean the difference between failure and success in your loan repayment journey. By following the above tips, you are on the right path.
The experts at CollegeFinance.com can help you get the most out of your college education investment. Check out the resources on our website or consider signing up for our monthly newsletter to receive updates in your inbox.