Getting a student loan is almost the easiest part of the student debt issue. What is harder is repaying the debt, together with its interest rate. Repayment takes years, and any mistake can delay the process further. However, the government recognizes these challenges and creates a more favorable environment for the borrowers to make the right decisions. The student loan grace period is one of those conveniences that the government provides to student loan debtors. This period usually covers six months after the borrowers graduate or their education falls below half-time. Six months of non-repayment gives borrowers some breathing room as they focus on how to repay the debt.
During this period, the debtors can plan their finances and choose a suitable repayment plan. Yet, the grace period has a disadvantage- interest can accrue during the grace period, which will lead to a higher debt balance.
This guide presents a grace period definition and its advantages and disadvantages. Besides, we introduce repayment plans so that you can choose the best plan once the grace period ends.
What is a Grace Period?
The federal government creates a favorable environment for borrowers to repay their loans. It is understandable that borrowers cannot find jobs immediately as they graduate. It takes time to find a job opportunity and pass all the stages until a new graduate finally gets employment. Hence, the government allows graduates to take some time off and focus on their career opportunities before starting the repayment. Besides, this period is helpful to plan the finances and choose a suitable repayment plan for the borrower.
The student loan grace period usually covers six months after graduation (or when a borrower loses qualification for non-repayment).
How long is the Student Loan Grace Period?
Depending on which type of student loan you get, the length of the grace period can change. For Direct loans, including PLUS loans, the grace period is usually six months. However, if a PLUS loan is requested by the parents, they should ask for the grace period on the loan application. Meanwhile, the student loan grace period is nine months for Perkins loan borrowers.
But what about private loans? Unfortunately, the government cannot require private lenders to offer a grace period. Therefore, it is at the discretion of private lenders to provide this benefit. Some lenders offer this benefit and usually start repayment six months after graduation (or when the loan becomes qualified for repayment). However, many other lenders require repayment as soon as the loan is disbursed. In short, check your loan agreement or contact your lender to know if you qualify for the student loan grace period.
When does the Grace Period Start?
The grace period does not always start once you graduate. The general rule is that your studies should not fall below half-time. Otherwise, the student loan grace period will begin. In case of graduation or you voluntarily enroll less than half-time, the grace period might start. Similarly, if you withdraw from studying, the same can happen.
However, if you decide to again enroll at least half-time before the grace period ends, you will qualify for non-repayment (as you study). Later, when you graduate, your grace period will still be six months, as initially planned. In other words, wasting some months of your 6-month grace period will not be a problem, and you will get the entire length of this period after graduation.
Factors Affecting Grace Period
Several conditions affect the length and start day of the student loan grace period. The first condition is being on active duty. This factor is effective if a borrower is called to active duty at least thirty days before the grace period ends. In this case, once the borrower completes the active duty, the grace period again starts. Besides, the borrower qualifies for the whole length- usually six months- of the grace period after returning.
Another condition is enrolling in a new school before the grace period ends. In this case, as you again enroll at least half-time, you do not need to start loan repayment. However, once you graduate or your education becomes less than half-time, you will qualify for a full-length grace period.
Lastly, loan consolidation affects the length and start day of the grace benefit. Unlike other conditions, in the case of a consolidation, you might become worse-off. If you decide to consolidate debt, your repayment can start as soon as consolidation is completed. As a result, if you were in the grace period, you could lose the remaining duration. However, you can also request consolidation to be delayed till the end of the grace period.
Interest Accrual during Grace Period
Although the idea of delaying repayment six months more seems attractive, it also has a drawback. If you do not have a subsidized loan, your interest payment can continue accruing during the grace period. Interest accrual for unsubsidized loans is similar to accrual during your study. Once the repayment starts, these accumulated amounts can be added to the original debt balance. This process is called capitalization, and it is not desirable.
Some percentage of the debt balance determines interest payments. Once interests accrue and add to the debt balance, your original balance increases, which means your monthly payments will also rise. Hence, you will pay more in the long run than what you owed before interest accrued.
Therefore, if you have unsubsidized loans, think twice before benefiting from the student loan grace period. You have the below-mentioned options during the student loan grace period.
No Payment
As mentioned, during the grace period, repayment is not required. While it gives you some convenience, the interest payments can accrue ( in case you do not have subsidized loans). It means, once repayment starts, the accumulated debt is capitalized. As explained above, your monthly payments will be higher, and you will pay more in the long run.
Pay Full Amount
Yet, non-repayment is not obligatory for the borrowers in the grace period. You can still choose to repay your debt as if no grace period is existent. In this way, you can start repayment fast and prevent surprises when due dates start.
Besides, even if you choose to repay the total monthly amount, you do not need to stick to this decision. You can pay at least once in two months or just give up whenever you cannot afford the payment. The main idea is to decrease your interest accruals and original debt balance before repayment is unavoidable.
Make Interest-only Payments
If you cannot afford full-monthly payments, you can also make interest-only payments during the student loan grace period. Usually, monthly loan payments cover the interest, the principal, and some fees. Therefore, you can ignore the parts for principal balance and make interest payments. In this way, you will not let the interest payments accrue. Alternatively, before your grace period ends, you can pay all accrued interests so that they do not capitalize.
Sure, we understand paying such an amount can be challenging. However, this strategy is worth trying because capitalization will have negative consequences.
Grace Period during Non-Repayment due to COVID-19
Once the pandemic hit the economy, many borrowers faced challenges to repay their debt obligations. Hence, the government started a non-repayment period. Currently, federal loan borrowers do not need to repay student loans. Meanwhile, the interest rate is set to 0%, which means no interest payment is accrued. The non-repayment period is set to expire in February 2022. Therefore, the repayment for federal loan borrowers should start in February if loan forbearance is no longer extended.
Remember that non-repayment due to COVID-19 does not impact the grace period. It does not delay or extend your grace period. So let’s stay until your grace period ends while the non-repayment period is continuing. In this case, repayment is not delayed; your repayment starts. However, as repayment is not required, you do not need to worry about repaying your loans before the loan forbearance period ends. Besides, no interest accrues during this period once the repayment starts.
Grace Period: What You Should Do During This Period?
Planning is essential during the grace period. You need to use this period wisely to avoid challenges once the repayment starts. Start with the basics; list all your federal and private loans. Find their original debt balance, interest rate, loan servicers or lenders, due dates, etc.
Choose a Repayment Plan
Next, check which ones are in a grace period and when the repayment starts. Finally, you need to choose a repayment plan to be prepared to pay off your debt. If you do not select any plan, you will automatically enroll in a 10-year Standard plan. This repayment option requires the amount needed to pay off the debt in 10 years.
If you think this amount is high for you, explore your other options, like a Graduated repayment plan. Generally, it is advisable to pay the highest amount you can per month. In this way, you can get rid of the debt fast. However, if your finances are bad, you can enroll in an Income-Driven repayment plan which mostly brings the most affordable rates.
Consider Auto-Pay
Some lenders allow borrowers to enroll in an auto-pay function. This function automatically deducts the monthly payment amount from a bank account when it is time for repayment. As a result, you will not forget or miss a due date. Besides, lenders can offer interest deductions, around 0.25-0.5%, if borrowers agree to auto-pay. As a result, you can also save money from repayment.
Start Repayment Fast
We explained this before, but let’s consider it again. Interest can accrue during the grace period (if you do not have subsidized loans). Therefore, you need to start repayment as soon as possible if you do not want to pay more than needed during the repayment period. Hence, even if you are in the grace period, try to repay the debt.
Borrowers with financial struggles might find it hard to afford monthly payments, but you can at least make interest-only payments. Alternatively, you might pay once in a while instead of every month. The general idea is to decrease accrued interest as much as possible.
Consider Minimizing Debt Obligations
If repayment is hard for you during the student loan grace period, it is highly likely that you will not be able to pay debt easily once repayment starts. Hence, you need to develop a strategy in case of financial struggles. After all, you only have six months to fix your finances, and it can be challenging to find a new income source.
Instead, try to minimize your debt obligations. As mentioned before, you can enroll in Income-driven repayment plans. These plans determine monthly payment amounts based on income level and family size. Hence, if you earn less, you will pay less.
Alternatively, you can refinance a student loan. Refinancing loans can have lower interest rates if you improved your credit or got a more stable income source since your first loan disbursement. You can check refinancing lenders and determine if you can save money from interest payments by refinancing a student loan.
Repayment after Grace Period
The student loan grace period aims to give enough time to borrowers so that they can focus on their finances and decide which repayment plan they will enroll in. However, once the grace period ends, it is time to start your repayment. In the following sections, we will discuss different repayment options to help you choose the most suitable one after the grace period.
Besides, you can use a loan simulator tool on the official Student Aid website to determine the rates through different repayment plans. Alternatively, you can contact your loan servicer to get more information.
As mentioned before, if your interest payments accrued, you might face higher monthly due balances. If you cannot afford the repayment, we will also introduce you to some debt management strategies for financially struggling borrowers.
Standard Repayment
If you do not choose any repayment plan, your loan will automatically be enrolled in a 10-year Standard repayment plan. As the name suggests, you will pay a fixed amount each month so that you can get rid of the debt in 10 years through this plan. However, if you have consolidation loans, the repayment can be as long as 30 years. Keep in mind that Direct loans, consolidation, and Stafford loans qualify for this plan.
Graduated Plan
Borrowers who face financial challenges during a student loan grace period might find it hard to afford a Standard repayment plan. In this case, a Graduated plan can be a better option. The payment amount starts lower in this plan. Then, every two years, the repayment amount gets updated and increases. Therefore, if you think you can find a job in the future and fix your finances, this plan can be a great option.
Extended Plan
The Extended plan is a mix of Standard and Graduated plans. You can choose to pay a fixed amount or a graduated amount with this plan. However, your repayment period will be 25 years. This repayment plan is available to Direct, Stafford, and consolidation loans.
Income-Driven Repayment Plans
Lastly, you can enroll in Income-Driven Repayment plans. These plans are based on your earning level and family size. Hence, if your family is big, your payments can be lower. Alternatively, in the case of low-income, you will not struggle with high debt payments. It usually takes around 20-25 years to pay off loans with Income-Driven repayment plans. Once the repayment period ends, the remaining debt is forgiven.
Remember that Income-Driven repayment plans have different categories like the Pay as You Earn or Income-Sensitive option. You can check each plan in detail in our blogs or official Student Aid website.
Final Words
The grace period allows borrowers to have some breathing room before starting repayment. Debtors can plan their finances and choose a suitable repayment plan during this period. While it seems like an attractive idea, the student loan grace period also has disadvantages.
Interest payments can accrue during this period and capitalize on original debt balances. Hence, you might end up paying more than required. This guide presented the grace period definition and the whole process in detail, but it is still advisable to talk to a debt expert. In this way, you can utilize this period to your benefit.
