Navigating the Six-Month Grace Period on Your Student Loans

Michael Lux Repayment, Student Loan Blog 8 Comments

Congratulations! You just graduated college. You discover that you don’t have to start paying back your student loans for six months. You’ve decided to use this magical grace period to treat yourself for a job well done. You’re going to use the money you would have used to make your student loan payments to take a trip around the world.

Before you book your reservations, though, think about the implications this might have on your financial future.

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. Consequently, each month you’re not paying the interest, it is compounding. With each month that you’re not making payments, your debt is growing.

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. Borrowers who struggle to find work after school have a few options to extend the grace period.

How Should I Handle the Grace Period?

Your grace period is the perfect time to be making a budget and putting together your plan to pay off your debt as soon as possible.

Don’t wait for a bill to arrive in your mailbox or your inbox. It is not your lenders’ responsibility to track you down. You have to find them. The longer you ignore your student loans, the higher the balance becomes. The banks and lenders know that, unlike credit cards, it’s incredibly difficult to discharge your student loan debt in bankruptcy. The dirty little secret is that the banks and lenders want you to take longer to pay back your loans and to incur some late fees. It is more money in their pockets.

This all means that you need to be proactive during your grace period. If you made payments on your student loans while you were in school, great. Keep doing this and pay a little extra if possible. If you didn’t do this, you need to start paying what you can as soon as possible.

What Not to Do

I know it is tempting to splurge a little on yourself after graduation. If you worked hard and had a little bit of luck, you might have found a job. You may be getting the biggest paychecks you have ever gotten in your life. You may think, “I deserve this.”

Whatever you do, avoid this impulse. For me, this impulse came in the form of a blu-ray player and a big screen tv. Don’t let it happen to you.  Repeat after me: I will not make any big purchases until I have started repaying my student loans.

If you just finished college, I have a bit of news for you: You have no idea how much money you have. It may seem like you have plenty, but once Uncle Sam, Sallie Mae, and your landlord have taken their share, you might find that there isn’t much left. If you are thinking about that graduation gift for yourself, just wait a few months. Use your grace period to make a few student loan payments and learn how much your current lifestyle costs before you start upgrading it.

Readers: Did you burn yourself with a post-grad purchase? 

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Eric

I completely ignored the grace period and kept on trucking. I had started paying day one while in school, so it was just the norm for me to be paying when I graduated.

Pauline

I thought most grace periods on student loans were not accruing interest. That is sneaky.
One more reason to pay them asap.

Untemplater

The six month grace period made such a difference for me. I was so worried about all the debt I had when I graduated b/c I had to pay half of my tuition and fees. And having that extra time to relocate and find a job first really helped. Every little bit makes a difference.

Digital Personal Finance

That’s a great point about the interest. I paid my grad school loans, or started paying them off I should say, beginning with the 6 month mark. I took advantage of the grace period, but in reality it helped because my job didn’t start until a few months afterward. Nevertheless, it’s a great idea that people know about interest starting right away.