Loans

How the Student Loan Grace Period Works

Getting a degree is a huge achievement. But if you take out student loans to cover college costs, the payments can be a financial burden once you leave school. Fortunately, many student loans come with a grace period, which means that you may not have to worry about making payments immediately upon graduation.

Although it can be tempting to put off thinking about your debt until several months down the road, you can set yourself up for success by taking advantage of the student loan grace period. Find out how student loan grace periods work and what you can do during that time to better manage your debt.

What is the grace period for student loans?

The student loan grace period is the period between leaving school and starting to make your payments. “It’s designed to give you time to find a job and put your finances in order before you have to worry about your payments,” says Kat Tritina, an Orlando-based personal finance writer and certified student loan advisor.

The grace period for federal student loans begins when you graduate, leave school, or drop to less than half of your registered time. The federal government pays interest on subsidized loans during the grace period. Not so with unsubsidized loans – any interest owed will be added to the loan balance if not paid.

If you have federal loans and you reenroll on a basis at least half the time before the grace period expires, they will reset, according to Mark Kantrowitz, student loan expert and author. “That’s why summer vacation doesn’t take up part of the slack,” he says. On the other hand, if you are to take an entire semester from school and have exhausted the grace period, you will enter reimbursement immediately. Kantrowitz notes that there is usually a 60-day transition period while loans are converted from in-school deferral to repayable status.

If you are a military service member called up for active duty for more than 30 days, your time away will not count toward the grace period and you will have the full term available after you return.

Some private loan companies offer grace periods as well. Check with the loan service to make sure you understand if you have a grace period and when your first payment is due.

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What is the grace period for student loans?

The federal grace period for a student loan is usually six months. Tretina notes that the exceptions are Perkins loans, which have a nine-month grace period and haven’t been cashed out since 2018, and PLUS loans.

“PLUS loans have no grace periods, but borrowers can choose to defer payments up to six months after graduation,” she says. If you receive a PLUS loan as a graduate or professional student, this deferment will occur automatically.

Grace periods for private student loans vary by lender, and some have no grace period at all.

“Also, some private lenders have a total school bearing period and a grace period of 51 months, so if the borrower takes more than four years to graduate, their loans may be repaid in the middle of the fifth year or immediately after graduation,” Kantrowitz says.

You can review the promissory note you signed for the length of the grace period, or contact the lender directly.

“While grace periods usually cannot be extended, you may qualify for hardship if you are ill or unemployed. If you qualify, you may defer your payments until your situation improves.”

Below is a breakdown of the grace period periods by loan type.

loan type grace period
Subsidized Direct Loans six months
Unsupported direct loans six months
Perkins Loans nine months
PLUS LOANS None, but borrowers may be able to defer for six months after a student graduates, leaves school, or lowers enrollment status at half-time
private loans Differs

How to get the most out of your student loan grace period

If you are preparing to drop out of school, it is important that you prepare to start your student loan payments. Here are some steps you can take to make the most of the grace period:

Find out when your first payment is due. Once you graduate, put a reminder on your calendar to get ready for your first payment five months later, says Kantrowitz. Keep in mind that you are responsible for making your loan payments, even if you did not receive a statement or voucher book from the lender. To find out when the first payment is due, you can log into your account at Federal Student Aid website or contact the loan service directly.

Organizing your finances. The months before your student loan payments are due is a great time to put your finances on track and prepare yourself for the added monthly expenses. There is often a lot of startup expense after graduation. “You have a new job, new work clothes, and maybe a new car,” Kantrowitz says. “You may have moved and have a deposit on a new apartment and utilities.” So use this period to create a budget and set aside some savings.

Set up automatic payment. If you have a strong financial foundation and can afford your upcoming payments, you may want to make it automatic. This way, you won’t have to worry about missing a payment, which can result in fines and could hurt your credit score. Additionally, some lenders offer interest rate discounts for an automatic payment setup. “Once the grace period expires, your payment will automatically be debited from your bank account,” says Tritina.

Consider making early payments. Making payments during the grace period can help you move forward with your debts. If you are not able to pay the full repayment amount, even a partial payment or a single payment will ensure that you have a smaller balance to deal with when the grace period expires.

You can also consider making interest-only payments. “If you can’t pay principal and interest during the grace period, making payments for interest or making a fixed amount each month — such as $25 — can reduce the amount of interest that accrues over time,” Tritina says. Unless you have direct federally backed loans, interest on your student loans usually accrues during the grace period. (Currently, federal student loans are in an automatic bearing period until May 1, 2022, at which point interest accrual is paused.)

Look for alternative payment plans. On the other hand, you may find your upcoming payments too expensive to handle. “If you discover that your payments are higher than you can afford, contact your loan officer immediately to see if there are alternatives,” Kantrowitz says. For example, you may qualify for a deferral or forbearance, which allows you to pause your payments (even though interest continues to accrue). Or, you may be eligible to enroll in an income-driven repayment plan, which reduces the size of your federal student loan payments to a small percentage of your income. In some cases, you may be eligible for a payment of $0 per month.

Private lenders may not have the income-based payment plans offered for federal loans, but check if your lender has a payment plan that’s right for you and your budget.

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