While payments aren’t required during this time, doing nothing could lead to missed chances to save money, plan effectively, and get ahead. Whether you’re extending the grace period or preparing to enter repayment, how you handle these six months can set the tone for your financial future.

Understanding the ins and outs of the grace period is the first step toward getting your loans under control.

What is the Student Loan Grace Period?

Grace conjures images of dignity, courtesy, and elegance. So, a grace period for your student loan repayment sounds nice. However, the term “grace period” is misleading.

Most federal and private student loans offer a grace period in which you aren’t required to make any payments towards your student loans. This period begins after you have left school or fall below half-time enrollment status. The grace period typically lasts for six months.

Although it seems like you aren’t paying any money during the grace period, the reality is that you probably are. Even though you’re not making payments, your interest is still accruing on most loans. In other words, your debt is growing.

Special Grace Period Rules

A few federal loans have special rules during the grace period:

Subsidized Student Loans – During the grace period, the Department of Education continues to pay the interest accrued on Federal Direct Subsidized Loans.

Graduate PLUS Loans – PLUS loans technically do not have a grace period. However, graduate and professional students automatically get a six-month deferment after finishing school or dropping below half-time enrollment.

Parent PLUS Loans – Repayment begins immediately on Parent PLUS Loans. However, parents can request a six-month deferment after their child finishes school or drops below half-time enrollment.

After the six-month grace period, repayment officially begins.

How Should I Handle the Grace Period?

The grace period is an ideal time to prepare for repayment. Strategically, borrowers can use this time to create a budget, explore repayment options, and even make early payments to reduce the principal balance, which can minimize accruing interest. It’s also an opportunity to decide if consolidation or an income-driven repayment plan is right for you.

However, many borrowers make the mistake of doing nothing during the grace period. Failing to act can result in being placed on the standard repayment plan, which is the most expensive option. Borrowers also risk losing contact with loan servicers, which could lead to delinquency or default. Missing critical updates or communications during this time can have lasting consequences. By actively preparing during the grace period, you can avoid costly mistakes and set yourself up for success.

Sherpa Tip: Before throwing money at your student loans, have a plan.

If PSLF or another form of loan forgiveness is the strategy for your federal loans, paying down accrued interest doesn’t usually make sense.

If you have a high-interest private loan, attacking it right away is often a smart strategy.

Pros and Cons of Extending the Grace Period

Many borrowers consider extending their grace period through various deferment or forbearance options, but this isn’t always advisable.

While extending your grace period provides extra time to find employment, it also delays repayment and can cause interest to accumulate. This can lead to a larger balance when repayment begins.

If you don’t urgently need the extension, entering repayment earlier can help you tackle your loan balance sooner and avoid the effects of capitalization on your interest. In most cases, getting signed up for an income-driven repayment plan is the ideal option. Most recent graduates qualify for $0 per month payments for the first year that they are in repayment. Not only does this save money, but $0 IDR payments count toward student loan forgiveness.

Student Loan Forgiveness and the Grace Period

Unlike time on an IDR plan, time spent in the grace period does not count toward forgiveness.

Even with the recent IDR count adjustment that credited borrowers for periods of deferment and forbearance, the grace period was excluded. PSLF seekers who are working in eligible jobs should consider leaving the grace period as soon as possible to continue building progress toward forgiveness.

Exiting the Grace Period Early

While there isn’t a formal way to simply “opt out” of the grace period, borrowers can effectively exit early by consolidating their loans.

A federal Direct Consolidation Loan pays off existing loans, including those still in the grace period, and does not come with a new grace period. Repayment begins immediately, allowing borrowers to start working toward loan forgiveness sooner.

However, the consolidation process can take months, so timing is important. If you are several months into the grace period, starting consolidation might cause further delays before repayment and forgiveness progress can begin.

Final Thoughts

For most federal student loan borrowers, navigating the six-month grace period is their first foray into managing student loans. Figuring out the best approach can be challenging, and loan servicers are not always helpful.

While it may seem overwhelming and unnecessarily confusing, it is also the ideal time to get your student loans in order. The longer you wait to get things under control, the more time you will lose toward forgiveness, and the more money you may unnecessarily spend.

This is one of those situations that isn’t easy, but for those willing to put in a bit of work, the benefits are significant.

The post Understand and Navigating the Six-Month Grace Period on Federal Student Loans appeared first on The Student Loan Sherpa.

The efforts and sacrifices that you make now will make a huge difference in your financial future. Even though you don’t have a bill due, your balance is growing on a daily basis due to student loan interest.

We traditionally recommend that college students make interest-only payments on all of their student loans during school. This provides a monthly reminder of the cost of student debt. As balances grow, the monthly interest-only payments grow. It becomes a good reminder to save money wherever possible.

However, for people who are about to finish school, or who have just finished school, we have a few different suggestions for eliminating debt.

Don’t forget to leave yourself a safety net

Smart financial planning includes an emergency fund. If you don’t have kids or a mortgage, you may not need a very large emergency fund, but it is always a good idea to have cash sitting around for the unexpected.

Most people choose to save anywhere from a few months to a couple of years worth of expenses in their emergency fund.You should consider your sources of income and what would happen to you if you lose that source of income. What would you do if you ran into car trouble? Medical problems?

The idea behind the emergency fund is to give yourself some breathing room in case you fall on hard times.

Attack the private loans first

Your federal loans have a lot of protections on them that the private loans lack.

For starters, with the many income-driven repayment plans available on federal loans, your monthly payment will never be more than a small percent of your discretionary income. That means if you lose your job, your monthly payments will be $0. Federal loans also have programs like Public Service Student Loan Forgiveness. If work for the government or a non-profit might be in your future, you may want to hold off on attacking the federal loans until you learn more about Public Service Student Loan Forgiveness. Sadly, if you are already working in public service, this time won’t count towards PSLF.

Private loans normally have terms that are far less borrower-friendly. For this reason, it makes sense for most people to attack them first.

Go after the high-interest debt

When it comes to picking a loan, mathematically, the most effective way to do eliminate debt is to pay the minimum on every loan and then use every extra available penny to pay down the highest interest rate loan.

If you are still in school or in your grace period, it means you don’t have any student loan payments due. That frees up all your student loan payment money to attack your highest interest rate loan. (Sadly, extending the grace period isn’t possible.)

Once the highest interest rate loan is paid off, attack the next highest interest rate loan.

Now is the time to start planning

Call your student loan companies to find out what your monthly payments will be. Learn about the different repayment plans available for both your private and federal loans.

You may have variables like employment and rent as unknowns in the future, but the sooner you understand your monthly debt obligations, the better you can prepare for it.

Bottom Line

There may be a number of variables in your future, but one certainty is your student loans.

The more work you can do now to eliminate the debt, the easier things will be in the long run.

The post Student Loan Payments Before Graduation and During Grace Period appeared first on The Student Loan Sherpa.