Extending a student loan grace period may seem like a dream come true.
Recent graduates, confronted with the harsh realities of student debt, can hit the snooze button on student loans wrecking their finances.
While there are options to extend the grace period, it isn’t always the best idea. Today we will cover the pros and cons of delaying repayment as well as some alternatives.
Is there a way to avoid starting repayment?
In most cases borrowers are able to extend the grace period by several months. Borrowers may delay entering repayment for years in some circumstances. This delay usually takes the form of a hardship deferment or forbearance.
Unfortunately, simply delaying repayment is a huge mistake for most borrowers. This is especially true for borrowers who haven’t found a job.
It may seem counterintuitive to suggest that borrowers without a job should start repayment, but the federal student loan forgiveness programs and income-driven repayment plans have amazing provisions for the unemployed. Borrowers make $0 per month “payments” and have each “payment” count towards student loan forgiveness.
Why is an extended student loan “grace period” bad idea?
For starters, it is important to realize that even if you are not paying your loans, the balance is growing (with a few exceptions). You may be concerned about your ability to pay now, but if you just kick the can down the road, you may find that it is even harder to pay in the future.
More importantly, there are repayment plans that are a much better deal than a deferment or a forbearance. For example, plans like income-based repayment lower your monthly payment to a maximum of 15% of your monthly discretionary income. If you don’t have a job, it means that your monthly payment is $0. This may sound much like a deferment or a forbearance, but it is much better. The interest is calculated far more favorably on repayment plans like REPAYE, and with each passing month, you get a little closer to student loan forgiveness.
The details get complicated with the forgiveness programs, but the short version is that after making payments based upon your income for 20-25 years, the remaining portion of your debt is forgiven. If there is even a possibility that you will take advantage of these programs, it makes sense to get started on the student loan forgiveness clock as soon as possible. Deferments and forbearances will only prolong your student loan nightmare.
However, for borrowers that just need a few more months without payments there is a relatively easy way to get a bit more time…
How do I add time to the grace period?
Two terms that get thrown around interchangeably are deferments and forbearances. In some cases, borrowers can qualify for a deferment as a matter of right. Examples include military service, unemployment, or Peace Corps service.
Borrowers who are not eligible for a deferment can often sign up for a forbearance. Forbearances can be granted during medical internship or residency programs, certain teaching positions, and when your monthly payment amounts to greater than 20 percent of your monthly income.
Further reading about deferments and forbearances can be found at the Department of Education’s website.
In most cases getting a deferment or a forbearance simply requires placing a call to your student loan servicer. If you are unsure of who services, your federal student loans, a full list of all federal loans and servicer contact information can be found on the Department of Education’s Student Loan Database.
The Worst Thing You Could Do
Many borrowers fear student loan repayment. Keeping up with the monthly bills may seem impossible.
As a result, they ignore, delay, and avoid.
Going this route will only make things worse. Interest continues to accrue and late fees added to the balance. For the vast majority of borrowers, a couple of phone calls or a bit of research can lead to a solution.
A Final Thought
Getting the first student loan bill is incredibly scary. Often it is more than borrowers expected, or can even afford to pay.
The good news is that there are a number of different federal repayment plans available. Almost all of these plans will have lower monthly payments than the one listed on that first bill. The first bill normally uses the standard 10-year repayment plan and the standard plan happens to have the highest monthly payment. The Department of Education has a variety of repayment options.
Getting started on student loan repayment sounds difficult, but it can be done. We have broken down repayment for beginners into four easy steps. The goal is to make sure borrowers are making smart moves but to also keep things simple so that it doesn’t get overwhelming.
Extending your student loan grace period is better than doing nothing, but better options exist.