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What Exactly Is a Student Loan Grace Period?
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Most federal student loans come with a grace period to give you some breathing room between graduation and your first student loan payment. But what is a grace period, exactly? And more importantly, how does it work?
Read on to learn what a grace period is and how it impacts student loan borrowers like you. Specifically, let’s look at…
A grace period is a period of deferment during which you don’t have to make any payments on your student loans. For most students, your federal loans are in a grace period while you’re enrolled at least half-time in school and for six months after you graduate.
“A grace period is a temporary period after graduation during which no payments are due on a student loan,” said Adam S. Minsky, student loan lawyer. “The idea is that borrowers may need some time to find employment before their loans become due.”
However, while most federal loans offer a six-month grace period, not all of them do.
“Direct loans have a six-month grace period before payments are due, but PLUS loans do not have a grace period (though you may be eligible for an in-school deferment while enrolled),” said Jay Fleischman, student loan lawyer and host of the “Student Loan Show” podcast.
When it comes to private student loans, the rules vary. Some lenders offer a grace period, whereas others expect you to start repaying your student loans right away.
It’s important to read the details of your student loan contract so you understand exactly when your first payment is due. And make sure to talk to your loan servicer and find out when your grace period is over.
Not sure who to call? Find your loan servicer using this guide.
Getting a break from paying back your student loans right away is helpful when easing into adult life by not being bombarded by your student loan balance. While it’s a nice perk of many federal student loans, it’s not a vacation from student loan repayment.
Interest might continue to accrue on your student loans
Depending on the type of student loans you have, the interest may keep accruing on your student loans, even while you’re enjoying your last respite from financial reality.
“It’s important to know that interest continues to accrue on all unsubsidized loans, so your balance will be higher when you begin repayment than when you stopped going to school,” said Fleischman.
If you have a large balance and a high-interest rate, an additional six months of interest could mean paying several hundred dollars more than you originally planned.
Note that interest will also continue to accrue on any private student loan, meaning you’ll face a bigger balance at the end of your grace period than you initially borrowed — unless you make in-school payments.
Consolidating your loans could end your grace period early
Another important thing to note is that if you consolidate your student loans through a direct consolidation loan, your grace period may be cut short. Consolidation can seem like a great solution for borrowers with multiple student loans, but it can also mean losing some perks.
“You lose any remaining grace period if you consolidate your loans,” said Fleischman. “Therefore, if you’re going to consolidate your federal student loans, it’s best to do so once your grace period expires.”
Although many private student loans don’t offer any kind of grace period, some lenders — such as SoFi — will honor your existing grace period if you refinance with them. So if you’re looking to merge your loan balances and get a better interest rate, refinancing could be a good option.
You should take advantage of your grace period by getting a repayment plan in place and preparing financially in these four ways.
1. Find out when your grace period ends
“Borrowers should contact their loan servicers to find out when their grace period ends, and they should understand their repayment before that first bill arrives,” said Minsky.
Your loan servicer should notify you of when your repayment will start, but you don’t want to be surprised when you get your first bill. You also don’t want to miss any payments, which could potentially lead to delinquency or default if you’re not careful.
2. Update your contact information
It’s also really important to stay in touch with your loan servicer and make sure your account information is up to date, such as your phone number and email.
“It is important to update your contact information with your loan servicer if it changes during your grace period,” attorney and student loan expert Heather Jarvis explained.
3. Learn about your repayment plan
Federal loans come with a variety of repayment options like income-driven repayment and graduated repayment.
But if you don’t choose a specific repayment plan, your federal loans will automatically be under the standard repayment plan, which gives borrowers 10 years to pay back their student loans.
Learn about your options, and apply for a plan that works best for your situation. And if you have private student loans, ask your loan servicer about your terms and monthly payments so you know exactly what to expect.
4. Consider making payments during the grace period
If you’re lucky enough to have scored a job right out of college, you can start paying back your student loans before your grace period is up. In fact, you can even make small payments while you’re in your school. While you’re not required to, doing so can help you put a dent in your debt early on.
If your loans are unsubsidized, you’ll be able to minimize how much interest accrues; and if your loans don’t accrue interest during the grace period, you can start attacking the principal balance right away.
Regardless of what you choose, you should mentally and financially prepare for student loan payments during your grace period. Be sure you fully understand your repayment plan and prospective monthly payments.
Your grace period is the time to get all your ducks in a row and pick a debt payoff strategy so you can climb out of debt as soon as possible.