Consumer Watchdog: Understanding the Student Loan Grace Period

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College graduates around the United States are still enjoying the sweet relief of being done with homework, exams, philosophical questions and dining hall food. But as the summer speeds by, the ramifications of going to college in the first place will be lingering in the shadows. Those ramifications are of course student loans.

It’s common knowledge that recent graduates experience a little bit of wiggle room before their lenders come calling, but the generic “6 months” rule of thumb may not actually apply.

This time of non-payment, known colloquially as a grace period, varies based on lender and type of loan. While your lenders are required to make contact with you (they do want to get paid after all), it is still your responsibility to track down all your loans. Don’t assume you’re evading a student loan just because your lender hasn’t gotten in touch yet. That’s a quick way to end up in delinquency and default.

[How to Track Down All Your Student Loans]

When the Grace Period Begins

Your grace period begins after your school has registered you as graduated, which actually doesn’t always happen the day of graduation. But in general, it’s best to just assume your grace period will end 6 months after you’ve received your diploma. A grace period can also kick in if you’ve left school before graduating or dropped below half time.

The Duration of a Grace Period

Federal loans and private loans have different grace periods and even federal loans weren’t all created equally.

Federal loans

  • Stafford loan (subsidized and unsubsidized) – 6 months grace period
  • Direct Unsubsidized Loans – 6 months grace period
  • Direct Subsidized Loans – 6 months grace period
  • Perkins loan – must check with school
  • PLUS loan – no grace period

Private loans

There is no guaranteed grace period with private loans, so it’s imperative you reach out to your lender.

Interest During the Grace Period

Just because the federal government (and some private lenders) offers a grace period, it doesn’t mean you’re receiving a 6-month free pass. In fact, you’re starting to accrue interest on most loans. The interest accrued during the grace period will then capitalize (be added to the principal balance) once you start making payments.

Federal subsidized Stafford loans and a Perkins loan will typically not accrue interest during the grace period.

Making Payments During Grace Period

Sure, a grace period could be seen as a sort of get out of jail free card for 6 months. You could avoid thinking about all the debt you owe and just enjoy some time of not factoring debt into your monthly budget.

But we wouldn’t advise you do this.

Instead, we suggest making payments.

Any extra money you can put towards loan payments during your grace period will help reduce the time it will take to pay back and how much you’ll be forking over in interest during the life of the loan.

You can make “interest-only” payments during your grace period to reduce the amount of accrued interest that would capitalize. If your loan doesn’t accrue interest, then you should 100% be making some payments to chip away at your principal balance before interest starts accruing.

Important Tip: You’ll have a minimum payment to make each month. If and when you make a payment higher than your minimum (even just by $10) – you need to tell your loan servicer that money is not intended to be put towards future payments. Loan servicers have a tricky way of avoiding putting extra payments towards your principal balance by putting it towards future payments instead. Be explicit that extra money should go towards your principal balance in order to dig out of debt faster.

[Learn More About Bi-Weekly Payments]

Fine Print of the Grace Period

You only get the grace period once. So if you graduated from undergrad, used the entire grace period, then went back for a Masters degree, your undergrad loans will no longer be eligible for a grace period after your second gradation.

You may also give up your right to a grace period if you consolidate your loans. Using a Direct Consolidation Loan will mean you revoke your right to a grace period and must begin repayment after your Direct Consolidation Loan is disbursed (aka paid out). The first bill is generally due about two months after the loan is disbursed.

However, if you don’t use up your entire grace period, you could be eligible to use it a second time and still get the full six months.

There are two major ways you can use part of a grace period and then reboot it later. Those are:

  1. You return to school before the end of your loan’s grace period – this could mean you left school for a semester and returned in undergrad or it could mean you graduated undergrad and then enrolled in a Master’s program 3 months later.
  2. You get called up to active military duty for more than 30 days before the end of your grace period. Once you return from active duty, you’ll get the full six months again.

Once it’s time to start making payments, you should enroll into Income-Based Repayment, or Income-Contingent Repayment or Pay As You Earn. You can also consider refinancing your loans to a lower rate, but beware you’ll lose federal loan perks.

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