What is a Student Loan Grace Period?

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• A student loan grace period is a set period of time before you must start repayments on your student loans.
• This grace period begins after you graduate, drop below half-time enrollment, or leave school and the time-frame can vary depending on the type of loan and the lender.
• Although you don’t have to make payments during the grace period, interest may accrue on some loans.

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You may have heard that if you take out a student loan, you potentially don’t have to make payments for a stretch of time. This is called a grace period. It is meant to give students some time to regroup and continue saving money in order to make their upcoming monthly student loan payments. Not all loans have a grace period and among those that do, the time-frame may vary among lenders.

Understanding what is a student loan grace period and how it works is key to making the most of this payment-free time.

Student Loan Grace Period: What It Is And How It Works

A student loan grace period is a period of time when student loan borrowers are not required to make repayments. This grace period typically begins from the day you graduate, drop below half-time enrollment, or leave school. Your loan repayments start after the grace period ends.

Most but not all federal student loans come with 6-month grace periods. For private student loans, it varies from one lender to another. You can find out when your grace period starts and ends by logging in to your federal student aid portal for federal loans or by checking your loan agreement or your promissory note.

Why Do Lenders Offer Student Borrowers A Loan Grace Period?

Lenders understand that students take on substantial loans to pay for their college education. Moreover, after graduation, it takes time for new graduates to find a suitable job and to build up their savings. The grace period is intended to allow borrowers time to find a job, earn an income, and build their savings. It will also give borrowers time to explore the different repayment plans and refinance options available and to determine how they are going to make those monthly payments.

Federal Student Loan Grace Periods

For federal student loans, the payment grace period begins when you graduate from college, reduce your coursework to a level that’s below half-time enrollment, or withdraw from college. The day any of these three scenarios happens, that’s the day your grace period countdown will start.

Note: Schools may vary in their definitions of half-time enrollment. If you’re planning on changing your class schedule, make sure to ask your school’s financial aid office how that would change your enrollment status.

Here’s a look at the grace periods for different types of federal student loans:

• Direct loans: 6 months
• Federal Perkins loans: 9 months
• Parent PLUS loans: 6-month deferment if requested on the application
• Grad PLUS loans: 6 months

Private Student Loan Grace Periods

Terms, conditions, and duration of private student loan grace periods vary among lenders. Some lenders require payments to start as soon as the funds are disbursed while others may offer a post-graduation grace period that could be six months or less.

Speak to your lender or read the loan agreement to determine the grace period. If you have multiple private student loans, find out the grace period for each one individually.

Does Interest Accrue During The Grace Period?

Knowing that you don’t have to make payments during the grace period can be a huge relief but does interest accrue during this time? Whether or not interest accrues during the grace period depends on the type of loan you have.

The federal government offers two types of loans – subsidized and unsubsidized. Subsidized federal loans, unsubsidized federal loans, and private loans all work differently in terms of interest accrual. Here’s what you should know.

Interest Accrual on Subsidized Federal Student Loans

With subsidized student loans, the U.S. Department of Education pays any interest that accrues on the loan amount until the first payment is due. That means they cover any interest that accrues on your subsidized loans while you’re in college and continue to pay the interest until your grace period ends. For your accounting purposes, interest does not accrue on your subsidized federal student loans during the grace period. However, interest will start accruing on the date the grace period ends.

Interest Accrual on Unsubsidized Federal Student Loans

Unsubsidized federal student loans work differently. With these types, interest starts accruing as soon as the funds are disbursed and keeps accruing through all non-payment periods including deferment and grace periods.

It’s important to understand the distinction. You may not be required to make payments until after the grace period ends but during this time, the unpaid interest charges are capitalized or added to your total loan amount. When the payment starts, you will have to pay back the principal along with the capitalized interest. This can increase the loan amount substantially.

Interest Accrual on Private Student Loans

Most private lenders allow student loan borrowers to defer payments while they are still in school. However, although you are not required to make payments during this time, interest will start accruing from the time you receive the funds. It keeps accruing right through the grace period and is added to your loan balance once the grace period ends. If the lender does not offer a grace period, the accrued interest will be added to your loan balance immediately after graduating or leaving school, when you are required to start repayments.

How To Make The Best Use Of Your Student Loan Grace Period

It’s smart to make a strategic repayment plan on how you are going to pay back your student loans. That way you can avoid defaulting and the resulting consequences of non-payment. You know you don’t have to make any payments for six months. Use this time wisely to sort out your finances and prepare to start making your monthly payments.

Student loan grace period to-dos:

1. Find out who your lenders/ student loan servicers are: Log into your FSA account to find out who your federal loan servicer is (if you have more than one loan, they may be managed by different servicers). Your private student loans will be managed directly by the private lender. Keep the names and contact details of your loan servicers/lenders handy in case you have questions or need help managing your repayment plan.
2. Determine what your monthly loan payments and due dates will be: Create a spreadsheet with the payment amount and due date for each of your loans. You’ll need these details to create a strategic repayment plan.
3. Review your monthly income and expenses regularly: As you start up your new job, start also setting aside some money every month to build up your savings – every little counts so stay focused on your end goal. Make sure in this budget review that you are putting away the money you need to cover those loan payments.
4. Set up automatic payments: Scheduling automatic payments is easy to do and ensures that payments go out on time every month. Paying student loans on time can give you a good start when it comes to establishing good credit.
5. Consider paying more than the minimum if you can afford it: If your budget allows it, consider paying more than the minimum, especially on the loans with higher interest rates. This helps you pay off your student loans faster. You’ll also save on interest over the shorter loan term. Remember, you should only do this if you have money left over after clearing the minimum payments on all your loans. Those minimum payments are mandatory to keep your loans in good standing.
6. Compare loan repayment options for federal student loans: If you think you’ll have trouble making your monthly repayments, you may be able to enroll in one of many income-driven plans available. These plans cap your payments at a percentage of your income so they are always affordable. Before you miss a payment, speak to your servicer to determine which plan is best suited for you. It can take time to process your application. To be on the safe side, apply at least two months before your grace period ends.
7. Determine repayment options for private student loans: Private student loans do not offer income-driven repayment options. However, private lenders will work with you and help you find a solution that works. If you cannot afford the monthly repayments on your private student loans, it’s best to speak to your lender and discuss repayment options in advance rather than miss the payment.

Can I Make Student Loan Payments During My Grace Period?

While you don’t have to, can you start paying your student loans during your grace period? Should you?

The answer is yes, you can start paying your student loans during your grace period. In fact, there are benefits to starting your payments early. Making payments toward your loan interest will prevent interest capitalization, saving you a lot of money. Another benefit of making payments during the grace period is that you’ll pay off your debt that much faster.

But this option may not be right for everyone. Whether or not you should repay during your grace period depends on a few factors.

• Did you manage to land a job right after graduation and does it pay a decent salary.
• Can you fit the early repayments into your monthly budget?
• Do the terms of your loan change if you start paying early?

It’s important to consider all of your options before selecting a course of action. Be sure to get into contact with your loan lender(s) and ask them about potentially repaying during your grace period.

Don’t Ignore Your Loans

It can certainly be easy to want to ignore your loans during the grace period, but it’s better to plan ahead and create a budget. Don’t hesitate to ask your college financial aid office or lenders for help with choosing the best way ahead. They may have invaluable resources and experience to help guide you.

College Raptor student loan calculator makes it easy for you to estimate your monthly student loan payments and overall loan costs. If you are considering refinancing your student loans, find and compare rates and lenders today.