For many borrowers, the grace period following graduation feels like a well-earned breather from student loans, but it’s also a critical window of opportunity.
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.
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.
I think the grace period can be very helpful for people looking for work, but people should be aware that they are not getting a free ride during this time.
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.
That is a fair point. Even if not paying the bill is helpful, it is still very important to be aware that your balance grows with each day that you put of paying your student loans.
I thought most grace periods on student loans were not accruing interest. That is sneaky.
One more reason to pay them asap.
I couldn’t agree more Pauline. The term “grace period” is so misleading.
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.
That was really smart Eric. I wish I would have been paying down my loans since day one.