What Exactly Is a Student Loan Grace Period?
You’ve graduated college and are ready to exist in the “real world.” Problem is that even though your school years are behind you, you’ll probably be paying for them for years to come. Fortunately, you usually do not have to start repaying your loans right away. This “waiting period” after graduation and before repayment begins is known as a “grace period.”
But what is a grace period, exactly? How does it work? Read this article to learn what a grace period is and how it impacts student loan borrowers like you.
What is a grace period?
Many federal loans grant student loan borrowers a grace period after they graduate. During this time, borrowers don’t need to start repaying their loans right away.
All Discover Student Loans provide you with a grace period after graduation. The student loan grace period is a period of time when you are not required to make your full (principal + interest) monthly payments, which begin when you enter repayment. Grace periods typically last for six months, but some loan types offer nine-months. After that period you’ll have to start making monthly loan payments.
Usually, federal loans offer a six-month grace period, but not all of them. For example, Direct Loans have a six-month grace period before payments are due, but PLUS Loans do not have a grace period.
When it comes to private loans, there is usually no grace period at all. Once you graduate, it’s important to talk to your loan service and find out when your grace period is over.
What you need to know about your grace period
Getting a break from paying back your student loans right away, and not be bombarded by your student loan balance, is so helpful for you.Grace periods are a tool meant to help student loan borrowers start off on the right foot. Student loan grace period gives borrowers some time to find a job and get themselves. It’s important to be financially established before student loan payments come due.
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.
You must 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. 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.
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. For borrowers with multiple student loans consolidation can seem like a great solution, but it can also mean losing some perks.
How to rock the grace period
Take advantage of your student loan grace period by getting a repayment plan in place and preparing financially. You should contact your loan servicers to find out when their grace period ends. Also, you must completely understand your repayment.
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.
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. It’s important for you that you don’t miss any payments, which could potentially lead to delinquency or default if you’re not careful.
For that reason, 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.
Also, 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. 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; if your loans don’t accrue interest during the grace period, you can start attacking the principal balance right away.
Remember, the most important thing is to prepare yourself mentally and financially for student loan payments during your grace period. Be sure you fully understand your repayment plan and prospective monthly payments.
Your benefits don’t stop with your student loan grace period.
If you’ve already used your grace period but still don’t have a job and you need a little more time, you’re in luck. You can choose between lots of federal student loans repayment options. This includes lower payment options and postponement for unemployment, to help you manage your loans while you gain your financial footing.
In this situation, when you think that you might need some relief, it’s important to call your loan holder sooner rather than later. This is important because some options may not be available for loans already past due.
Consider Consolidating or Refinancing
Your grace period is also a great time to start thinking about whether you’d like to consolidate or refinance your loans. Consolidation puts all your loans in one place and with one servicer but does not change the total amount of interest you’ll pay on the loan(s), while refinancing can do this plus lower your interest rate to actually reduce what you’ll pay in total interest.
Consolidation can be a good option for graduates who have a few different types of loans and for whom making multiple payments are stressful. Also, consolidating your loans allows you to retain the benefits of federal student loans, such as income-based repayment.
Refinancing, on the other hand, is worth looking into if you have good credit, a steady job (or job offer letter), and can show that you have the means to meet monthly payments. If you plan to take advantage of government programs such as income-based repayment, however, refinancing may not be a good fit, as it’ll cause you to lose these benefits.
Even if refinancing isn’t a good option right now (as is often the case for recent grads who are still building their credit and don’t have a steady income), now is the time to think about whether it might be a money-saver in the future. Perhaps set a calendar reminder for one year from now, or for when you expect you might get a raise, to re-evaluate your financial profile and consider whether it’s a good time to refinance.
Use This Time to Save
Even if you don’t want to start paying off your loans early, it’s a good idea to start saving for those payments as soon as possible so that you start off on the right track.
You have a few options if you know you will not be able to make your payments once your grace period ends: The requirements for deferment (interest typically does not accrue) are quite strict, and forbearance (interest will accrue) requires an application. Simply not paying them is a bad idea as it will put you into student loan default, which will hurt your credit for years to come, and you may also incur additional fees along with accrued interest. (Of course, it is possible to recover from student loan default, but it could take years.)