You’ve graduated college and are ready to enter the “real world.” But even though your school years are behind you, you’ll probably be paying for them for years to come. Fortunately, most federal student loans come with a grace period to give you some breathing room between graduation and when payments are due.
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.
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.
“A grace period is a temporary period after graduation during which no payments are due on a student loan. Typically it lasts around six months,” said student loan lawyer, Adam S. Minsky.
“The idea is that borrowers may need some time to find employment before their loans become due.”
However, while many 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),” added Jay Fleischman of the Student Loan Show.
When it comes to private loans, the rules vary, but there is usually no grace period at all. Once you graduate, it’s important 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.
What you need to know about your grace period
Getting a break from paying back your student loans right away is a helpful way to ease into adult life and not be 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.
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.
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.
Fleischman noted, “You lose any remaining grace period if you consolidate your loans. Therefore, if you’re going to consolidate your federal student loans, it’s best to do so once your grace period expires.”
Though 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.
How to rock the grace period
You should take advantage of your grace period by getting a repayment plan in place and preparing financially.
“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.
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. You also don’t want to 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.
“It is important to update your contact information with your loan servicer if it changes during your grace period,” explained student loan expert Heather Jarvis.
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.
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.