Student Loan Repayment: Grace Periods What to Know

Updated April 15, 2022

If you got a loan for school, you should have had some counseling regarding your debt. Student loan debt is probably the least exciting part of graduating from college. If you are a recent graduate, you may hear a whole lot about a 6 month grace period. Let’s explore exactly what a 6 month grace period is, how to prepare for the end of the 6-month grace period, or how your approach to the grace period will affect you in the future.

Grace Periods

“No one told me about this” if that’s what you said when you read the intro paragraph; well you wouldn’t be the first, but you are in the right place! As a borrower, you are responsible for your financial decisions. It’s your responsibility to assure your loan gets paid on-time. If you don’t make payments on your loan in time it will affect your credit and could take a long time for that delinquency to be removed. A grace period is provided by the lender to a borrower. Grace periods are common for any type of loan not just student loan debt and can be common with credit cards too. The lender will allow you a specified period of time in which you are excused from making payments towards the debt. If you’re a recent college graduate, you’ll likely receive a 6 month grace period. The length of the grace period you’ll receive can change based on the types of student loans you have and who your loan provider is.

Unsubsidized Stafford Loans Vs Subsidized Stafford Loans

If you have a  Stafford Loan after Graduation you’ll be granted a 6 month grace period in which you are not required to make payments. If you have a Subsidized Stafford Loan that was originated before July 1, 2014, it will not accrue interest during the grace period. If you have an Unsubsidized Stafford Loan you will be responsible to pay the interest that is accrued while you utilize in-school deferment, grace period, or once the interest is capitalized upon repayment.

Direct PLUS & Parent PLUS Loans

Direct PLUS loans are taken out by graduate students without a cosigner. There is a 6 month grace period after the student is no longer enrolled for at least half-time. Interest is accrued from the time of disbursement and is capitalized at repayment.

Parent PLUS loans are taken out by parents or guardians, of dependent undergraduate students. Repayment is expected when the loan is disbursed. Interest will begin to accrue from the time of disbursement. There is an optional 6 month grace period once the student is no longer enrolled for at least half-time.

Federal Perkins Loans

These loans are provided to students that have “exceptional financial need.” After you graduate, withdrawal, or drop under half-time status you have a nine-month grace period. Borrowers with Perkins loans shouldn’t be charged during the initial grace period.

Private Loans

Private loans vary, so if a grace period is permitted it is ultimately up to the lender who provided you with the loan. Typically you should be able to find any information regarding a grace period in your loan agreement. When using a private lender it’s likely that interest will be accrued during the grace period and then ultimately capitalized upon repayment.

What is Capitalized Interest?

Capitalized Interest can seem pretty complex, but it’s fairly simple and REALLY important that you understand what it is. When your loan is disbursed or the funds are sent to your institution, the interest on that loan starts to accrue. Yes, even if you are still in school interest is being accrued on those funds. Upon your repayment that interest will get added onto the principal balance of your loan. Now, capitalized interest will depend on the type of loan that you have. As we discussed above some loans will accrue interest and some will not so be sure to know the types of loans that you have.

So how exactly does capitalized interest work? Let’s say that you went to school for 4 years, borrowed $10,000 a year with a 7% interest rate. So you borrowed a total of $40,000 from your lender.  If you didn’t make payments during school and you had a 6-month grace period (no payments) you would have acquired $1,412 in interest only, after the grace period! If you had a 10-year loan term, the total amount that you’ll have paid on the loan with interest capitalization is $57,700.  That equates to an additional penny for every dollar you borrowed. Try calculating your capitalized interest here

Financial Planning

It should go without saying, but if you can make payments while you’re in school or payments while you’re in your grace period, do it! If you are the last minute type of person and didn’t know about capitalized interests until just now, it’ll be okay. Step one- don’t panic! Here are some ways that you can pay down your debt.

Pay over the minimum payment. Regardless, if you’re on an Income-Based Repayment plan or just making the minimum payment, interest is still being accrued! In order to cut down on the interest being accrued and concentrate more of those payments onto the principle of your loan, you need to pay more. It’s easier said than done, but any additional money that you can put towards the debt will help you to pay less overall. Try making a budget that will allow you to make bi-monthly payments towards the debt. Bi-monthly payments will allow you to pay down the interest sooner so your payments are concentrated on the principle of the loan.

Look to an Employer

A benefit that companies recently have found beneficial is helping employees with student loan debt. Some companies offer resources for graduates like paying contributions toward the debt and offering other financial resources. If you are in the market for new employment, try looking into this as a company benefit. If your employee can contribute to your debt pay down you’ll have the ability to pay it down sooner!

SideGigs

Lucky for you, the gig economy has become rather popular! Try picking up an extra side job, where the profits can all go straight towards your debt. You don’t need a special talent to have a side job. Though a talent helps there are always jobs like babysitting, dog walking, or even housesitting. If you aren’t sure where to start there are a ton of websites that you can use to create a profile and get connected with people locally.

Refinance Student Loans

If you have a high interest rate and a steady income refinancing student loans could be a good option. Refinancing allows you to combine multiple loans into one loan, allows you to select the repayment terms, and can help to cut down on the interest rate. In order to qualify for a student loan refinance you’ll need a steady income and usually a FICO score of 650 or higher. If you can’t qualify on your own, be sure to ask about adding on a cosigner.

Responsible Borrowing

If you’re a recent graduate or in-school currently, don’t try to hide from your debt. Avoiding making payments on your loan will only hurt you and your credit history. Do your research and talk with your lender. The more you can educate yourself as a borrower the better. Just remember, you’re building a strong foundation and you’ll be establishing yourself as a financially responsible borrower.  In a few years, you’ll be thanking yourself for the responsible financial choices that you’ve made!

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