Understanding Student Loan Grace Periods and How to Manage Them

Graduating from college is a significant milestone, but it also marks the beginning of student loan repayment for many. Fortunately, student loan grace periods provide a buffer before you need to start making payments. This article will explore the nuances of student loan grace periods, how interest works during this time, and effective strategies for repaying your student loans. If you need any mortgage services, O1ne Mortgage is here to help. Call us at 213-732-3074 for expert assistance.

Do Student Loans Have a Grace Period?

Yes, student loans typically come with a grace period, which is a set number of months before your first loan payment is due after you leave school. The length of the grace period varies depending on the type of loan.

Federal Student Loan Grace Periods

For federal loans, the grace period usually starts when a student graduates, withdraws from school, or reduces their coursework to below half-time enrollment. Here are the grace periods for different types of federal student loans:

• Direct loans: Six months
• Grad PLUS loans: Six months
• Parent PLUS loans: Six-month deferment upon request
• Federal Perkins loan: Nine months

Private Student Loan Grace Periods

Private student loan grace periods vary by lender. Some lenders may offer a grace period of six to nine months, while others might require payments while you’re still in school. It’s essential to check with your lender to understand the specific terms of your loan.

Do You Pay Interest During the Grace Period?

During the grace period, you are not required to make interest or principal payments. However, interest may still accumulate and be added to your balance, or capitalized, if you don’t pay it before your first loan payment is due. Making at least interest-only payments during the grace period can save you a significant amount of money over the life of your student loans.

Subsidized Student Loans

With federal subsidized student loans, the U.S. Department of Education covers the interest until the first payment is due. This means you won’t pay any interest on your subsidized loans until after the grace period ends. For example, if you took out $20,000 in subsidized student loans, that is the total you’ll owe when you begin making payments. After that point, interest will start to accrue.

Unsubsidized Student Loans

Interest on federal unsubsidized student loans starts accruing immediately when you take out the loan. Borrowers must pay all the loan interest, including interest that accumulates during periods of deferment and grace periods. While you’re not required to make interest payments on federal unsubsidized loans until the grace period ends, any unpaid interest charges are capitalized, or added to your total loan amount. Making interest-only payments while you’re in school or before your grace period ends can save you a lot of money when repaying your loans.

Private Student Loans

Interest typically begins accruing on private student loans when you receive the funds. Your lender may allow you to defer payments until after leaving school and after any grace period if it offers one. Keep in mind, though, that any unpaid interest will be added to the loan balance once the grace period ends. As with unsubsidized federal student loans, paying all or as much loan interest as possible before the grace period ends will give you significant cost savings.

How to Repay Your Student Loan

When it’s time to start repaying student loans, the following tips can help you pay down your balances and make payments manageable:

Prepare for Loan Payments

Several months before your loan grace period is set to end, review your loans to understand the terms, minimum payments, and due dates. Next, assess your monthly income and expenses to figure out how payments will fit into your budget.

Set Up Automatic Payments

Scheduling autopay for loan payments is a way to avoid paying late. If you leave school with limited credit history, paying student loans on time can give you a running start on establishing good credit.

Pay More Than the Minimum

Minimum payments are all that’s required to keep student loans in good standing, but focusing extra payments on graduate loans and other loans with higher interest rates could help you pay off student debt faster.

Defer or Forbear if Necessary

If you’re not ready to make student loan payments when your grace period expires, consider pausing payments by applying for student loan deferment or forbearance. Note that interest does not accrue on subsidized loans during a deferment but does accrue on subsidized loans during forbearance. For unsubsidized loans, you are always responsible for paying interest, including when you qualify for a deferment and if you seek forbearance.

Contact Your Lender if Money Gets Tight

It’s better to contact lenders before falling behind on loan payments because you may be able to work out a payment plan. Federal student loans, for example, offer income-driven repayment plans that can set your payment based on how much you’re earning. This can make payments more manageable when your income is low, or you have trouble finding work.

See if You Qualify for Student Loan Forgiveness

People who teach or work in public service for several years may be eligible for federal loan forgiveness programs, such as Teacher Loan Forgiveness and Public Service Loan Forgiveness (PSLF). If you work for the government or a not-for-profit organization, consider reviewing program conditions and learn how to certify employment annually to get your balance forgiven after making the required number of loan payments.

The Bottom Line

Federal loan grace periods are generally six months, giving you some time to find a job before payments are due. Since private student loan grace periods vary, check with your lender before leaving school to find out when you’ll have to start paying down student debt.

It’s important to know when to start making student loan payments since missed payments can show up on your credit report and negatively affect your credit score. If you’re ever curious about what’s on your credit report, you can get your Experian credit report and score for free to help you verify credit account records and monitor score changes.

For any mortgage service needs, O1ne Mortgage is here to assist you. Call us at 213-732-3074 to speak with one of our experts and get the best advice tailored to your financial situation.