A student loan grace period is a stretch of time after you’ve graduated or left school when you’re not required to make payments according to NerdWallet. Here’s what to know about the student loan grace period and how to use this time wisely.
What is a student loan grace period?
Most of us don’t have a job lined up and ready to start as soon as we graduate from school. That’s why most student loans have a “grace period.”
The grace period is a set amount of time (usually 6 months) after graduation in which you are not required to make monthly payments on your student loans. This is your time to start working and collecting a steady paycheck.
While you don’t have to make monthly payments during the grace period, know that interest will still accrue during this time.
Do my student loans have a grace period?
Direct Subsidized Loans, Direct Unsubsidized Loans, Subsidized Federal Stafford Loans, and Unsubsidized Federal Stafford Loans all have a six-month grace period.
PLUS loans (like the Parent PLUS and Graduate PLUS) have no grace period.
If you have other federal loans or private loans, check with your servicer or lender for details about when your first payments are due.
What to do once your grace period is over
If your grace period is about to end, here’s what should you do next to help eliminate student loan debt:
Find out who you owe
First, you want to figure out who your loan servicer is (or are… you could have more than one). A loan servicer is the company that will be collecting payments from you. It may be different than who you originally took your loan out with! Some common servicers of federal student loans are FedLoan Servicing, Great Lakes, Navient, and Nelnet.
For federal loans, you can use the nslds.ed.gov database to see all of your loan servicers and amounts. For private loans, log on to your account at your lender’s website and you should be able to find your loan information. If you cannot locate your loans, contact your school and they should be able to help you. Talk to your lender right away if you need to update your address or notice any other outdated information.
Write out what you owe
Second, write down what your current interest rates are, how much you owe in total, what your monthly payment will be for each loan, and their due dates.
Create a budget
Now that you’ve reviewed your loan documents, take the time to create a monthly budget and make sure you include your expected student loan payments. This will help you understand if your student loans are putting too much pressure on your budget or if you have extra money left over that you could be putting towards your student loans. Getting a clear picture of your financial situation will help you find the repayment strategy that fits you best.
Select your repayment plan
If you do nothing, your federal student loans will automatically enter into the standard 10- to 20-year repayment plan by default.
If your budget is tight, you might want to consider an income-driven repayment plan to lower your monthly payments. Note that paying a lower monthly payment may stretch out the life of your loan and increase the total interest you will pay over time.
On the other hand, if you have extra funds to use, you will want to pick a plan based on the highest monthly payment you can manage, which will help you reduce the overall cost of the loan.
If you don’t plan to use an income-driven repayment plan, you may want to consider refinancing your loans, which could lower your interest rate and allow you to pay down your debt even faster. Here are the top lenders to refinance in 2020:
Focus on the highest interest loans
If you do have an extra budget from side hustles to put towards your student loans, make sure you focus on the ones with the highest interest rates first. Applying extra payments to the loan with the highest rate will save you the most money.
Some borrowers instead focus on the loans with the smallest balances, hoping to get a psychological boost from paying the loan off quickly. But this will not necessarily save you the most money.
Make sure you don’t miss your first payment
Borrowers are more likely to miss their first payment over any other payment. This is because it is easy to forget about your student loans during the grace period. Set a calendar reminder a few weeks before the first due date to make sure you are ready to make your payments.
Keep any eye out for grace period lengths when reviewing your loan documents as they can be different for some loans.
Sign up for auto-debit
To avoid missing or late payments, sign up for auto-debit. This authorizes your bank to automatically transfer the monthly payment from your account to the lender. Also, many lenders provide an interest rate reduction in exchange for setting up auto-debit with electronic billing so it could even help save you money.
Claim student loan interest deduction on your taxes
In many cases, the interest portion of your student loan payments are tax deductible. Your deduction is limited to interest up to $2,500 or the amount of interest you actually paid; whichever amount is less. Your lenders are typically required to provide you a Form 1098-E if applicable.
One bonus is that student loan interest deduction is taken as an above-the-line exclusion from income, so you do not need to itemize to claim the deduction on your tax forms. There are some limitations, but this is important to keep in mind for tax season.
It is very important to avoid defaulting on your loans. When you enter default, your loan balance immediately becomes due, your credit score takes a hit, collections fees are added, and the government can garnish your wages and tax refund. If you are having trouble making your monthly payments, leverage options like forbearance and deferment.
Deferment allows you to postpone your scheduled monthly loan payments. Loan types and servicers have different qualifications and requirements for deferment, as well as various lengths of time you’re allowed to take. If you or your loan does not qualify for a deferment, you may request a forbearance.
A forbearance allows the temporary reduction or postponement of payments for periods of up to one year at a time. Receiving a forbearance is not automatic, however you must apply and provide documentation to demonstrate the hardship preventing you from making your payments. You will also have to continue your payments until you are notified that your forbearance has been granted. You can always speak with your loan servicer to get advice for your specific situation.
A final word
If your goal is to save money on your student loans and you don’t plan to use federal programs like income-driven repayment and public service loan forgiveness, definitely check to see if you can lower your interest rates through refinancing.
If you’re worried about losing federal protections, know that CommonBond offers forbearance for up to 24 months if you need to pause payments, deferment for up to 32 months if you go back to school, and forgiveness in the event of death or disability so your loans aren’t passed on to your family if something happens to you. Plus, the entire process is free.
To get started, check what your new rates could be. If they’re lower than your current rates, that’s great news because it means you could save money long-term, on a monthly basis, or both.