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What Happens to Student Loans During a Gap Year?

Taking a break from college can have a major impact on student loans. Problems can be minimized by planning ahead.

Written By: Michael P. Lux, Esq.

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Students choose to take a gap year for a wide range of reasons. Some wish to save money, others want to travel, and some use the time to prepare for graduate school.

Despite the multitude of reasons why a student might elect to take a gap year, the student loan consequences are generally identical for everyone.

In many cases, existing student debt doesn’t majorly impact gap year plans. Nonetheless, planning your gap year with your student loans in mind from the beginning can be greatly beneficial.

The Student Loan Grace Period and a Gap Year

All federal student loans offer a grace period of at least six months, for which students are not required to make payments. This grace period starts after a student leaves school, giving them time before they need to begin repayment. For example, if a student stops attending school in May, the student can typically expect to start making payments in November.

For private student loans, the existence and length of a grace period depend on the loan’s contract terms. Some lenders offer a shorter grace period or no grace period at all. However, in most cases, private student loan lenders align with the federal standard of six months.

This means that in a 12-month gap year, a borrower may only have to make payments for the last six months.

One important note to remember is that borrowers get only one grace period per loan. This can complicate matters for borrowers who return to school and take out additional loans. While most borrowers enter their grace period upon graduation, borrowers who took a gap year might have loans that require immediate repayment.

Another important note is that most loans accrue interest during the grace period.

Interest Will Continue to Accrue*

Borrowers looking to delay or reduce any payments required during a gap year have several options available to them.

Federal loan borrowers can apply for income-driven repayment plans, which means that a borrower’s monthly payments can conceivably be reduced to $0 depending on their income. Private loan borrowers might be able to request additional forbearance or deferment after their grace period ends, further delaying repayment.

Unfortunately, these strategies for reducing or delaying payments come with a significant drawback: the accumulation of student loan interest. Student loans accrue interest daily, increasing the total amount owed.

Taking a year off from school allows the student loan debt to grow exponentially. This is an extra cost to a gap year that borrowers should carefully consider.

However, there is one strategy that many federal loan borrowers can pursue to avoid accruing interest during their gap year.

Avoiding Interest Charges

Federal borrowers now have the option of applying to the SAVE income-driven repayment plan.

Unlike other federal income-driven repayment plans. SAVE offers a generous subsidy that covers 100% of the monthly unpaid interest. For borrowers eligible for $0 monthly payments, SAVE will cover 100% of the interest charges that would typically accrue under other plans. This means that your federal student loan balance will not increase for taking off a year and not making any payments.

It is worth mentioning that the monthly amount you owe under a SAVE repayment plan is calculated based upon your most recent tax return. Thus, if you were a full-time student when you last filed your taxes, it’s very likely you could qualify for $0 monthly payments under SAVE. This is true even if you earn some income during your gap year.

Even for those borrowers who don’t qualify for $0 per month payments on SAVE, the interest subsidy is still available. This calculator will break down your monthly SAVE payment and subsidy.

Borrowing Implications Upon Returning to School

For the most part, borrowing student loans after a gap year works just like it did before the gap year.

However, there are a couple major exceptions that borrowers should understand.

First, those who take a time off from school in order to earn extra money may qualify for less need-based aid when they return to school. This could result in fewer grants and possibly qualifying only for unsubsidized federal loans instead of subsidized loans. This is an important consideration for those thinking about taking a gap year to improve their financial situation.

Second, financial decisions made during a gap year could impact future student loan borrowing. For example, a borrower who accumulates a lot of credit card debt during their gap year travels may find it more difficult to qualify for private student loans upon returning to school. Additionally, missed student loan payments during a gap year can make qualifying for future loans far more challenging.

Avoiding financial mistakes during a gap year is one of the reasons why it is so important for borrowers to stay organized.

Tracking Student Debt During a Gap Year is Essential

If you decide to take a year off from school, dealing with your student loan servicers is something you can’t really avoid. For example, you might need to ask for an additional deferment or request lower payments; regardless, these you’ll probably have to interact with them.

Keeping up with payments and safeguarding your credit score is essential, but there’s more at stake than just that.

One harsh reality that many student loan borrowers discover is that they have no control over the company that owns their debt. Private lenders routinely sell the debt to other companies. Federal loan servicers often change.

When this happens, it can be very difficult for borrowers to know who to pay or how much they owe. Some don’t learn that their debt has been sold until a creditor calls them asking about missed payments. By that point, the credit score damage may already be done.

Given the possibility that your loan could be sold, keeping your contact information up to date with your lenders is crucial.

Updating your details with loan servicers isn’t just helping them. It’s a vital step to protect yourself. If there’s a change in the loan servicer, for example, staying informed ensures you don’t miss important updates or payments.

The Lesson: Plan Ahead

Regardless of the reason a borrower chooses to take a gap year, it is essential to have a solid plan in place for managing student loans during this time.

Borrowers should know when repayment will start, determine which repayment plans are available to them, and figure out how they will be afford the monthly payments.

Neglecting the planning stage could lead to late fees and the unnecessary buildup of interest, making the loan even more expensive in the long run.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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