The grace period for most federal student loans is six months. Many private lenders also give borrowers six months before repayment begins.
At the end of these six months, many borrowers are confronted with an unfortunate reality… student loan bills. Sadly, for many recent graduates six months is not enough time to secure a salary that pays enough money for these bills. Regardless of financial circumstances, there are steps that can be take before and after a student loan grace period to minimize interest accumulation.
Is there a way to avoid starting repayment?
In most cases borrowers are able to extend the grace period by several months, and possibly years in some circumstances. This usually takes the form of a hardship deferment or forbearance. However, 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 offer great protections for the unemployed.
Why is an extended “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.
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. This is because the standard repayment plan is the 10-year repayment plan. With plans that extend repayment or lower monthly payments based upon income and family size, there are much better options available for most borrowers.
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.