Graduating from college means many monumental changes, including taking on the responsibility of paying back the loans that have been taken out. Luckily, with most student loans, you have what is known as a grace period. The grace period is a duration of time where you are not yet required to make student loan payments. By maximizing your grace period, you can be better prepared to cover your loan payments in a way that works for you. These are the steps to take to make the most of it.
How Does a Grace Period Work?
For federal loans like subsidized and unsubsidized Stafford Loans, when students are in school on at least a half-time basis, the loans are deferred. The grace period extends deferment after graduating and during specific defined periods. Typically, the grace period is six months. With subsidized loans, the federal government pays the interest during these times. Although no payments are required in the grace period, the loan’s interest will grow if interest is accruing, and no payments are being made.
Many private lenders also offer grace periods. However, it’s essential to check with your loan provider, as every lender’s policies are different. If your lender does not provide a grace period, loan payments will start immediately after graduation.
It’s best not to think of your grace period as a vacation from student loan payments. It is merely a time to strategize and devise a plan for paying off your loans as quickly and efficiently as possible.
Figure Out What You Owe
A surprising number of graduates have no idea what they owe. A study performed by the Brown Center on Education Policy at Brookings showed that half of all borrowers underestimate their student loan debt. Only 25% of borrowers could make a guess that came within $5,000 of their actual debt load.
If you’ve taken out multiple federal student loans and are unaware who your loan servicing company is, Federal Student Aid is a great resource. You can also discover your total debt, interest rates, and your monthly payment. It can be a little trickier if you have private student loans. If you are unsure of who your private student loan servicing company is, you can contact your school’s financial aid office, and they can access your financial aid information.
Figure Out Your Repayment Plan
The next step is choosing a repayment plan. If you have private student loans, you may only have standard repayment as an option. However, some lenders may have other options available that make payments more manageable. For instance, your lender may offer a period of interest-only payments. This plan can be beneficial for recent graduates who are currently not earning as much as they may in the future. Be wary, though. Your monthly payment will be higher once the interest-only period is over, seeing as you will start paying back both the principal and interest.
Federal loans are typically more flexible. There are about half a dozen basic options, each with individual benefits and drawbacks. Standard repayment is defined as it sounds: the plan you’ll be enrolled in if you do not choose an alternative. Similarly, it also utilizes fixed payment amounts over a period of ten years. For those who desire lower payments now but anticipate higher income and paying more in the future, a graduated repayment plan may be more beneficial. However, borrowers will pay more in interest over time with this option.
Income-Based Repayment (IBR) is available to those with a debt level relative to their income. IBR requires the borrower to stay up to date, seeing as one must reapply every year. With IBR, any remaining balances are written off after either 20 or 25 years, depending on when you acquired your loans. While IBR can mean less out of pocket each month, it may also mean spending more time with student loan debt hanging over your head.
Not every borrower will qualify for every repayment plan. Options will depend on factors that include income and the type of loan. Use the loan simulator offered on StudentAid.gov to determine which method works best for you. If your circumstances change, you can change your mind.
Decide How You Are Going to Pay
Once you are out of school and working, create a budget that accounts for your student loans. Will you pay out of your salary? Make a plan that allows you to set aside each check, so bills don’t sneak up on you each month. See if your lender offers a discount for options like auto-payment. In some cases, a small amount of interest is deducted for auto paid accounts, which can add up to significant savings over the life of your loan.
Suppose you plan to use savings or a windfall toward student loan payments, research options that include paying off extra amounts of the principal. Researching allows you to cut down the size of your debt as a whole, which can save you thousands in interest.
Make a Contingency Plan
No matter how secure a job or a paycheck looks, there is always something that can go wrong. The possibilities are endless. What happens if you lose your job? How about moving to a new area with higher living expenses? Maybe even having to take on unexpected debt?
If you find yourself faced with a short or long term emergency, it is always a good idea to have a handful of back-up plans. Start building an emergency fund that, ideally, will have six months of expenses handy. The most efficient way to do this involves placing regular contributions into your account. This way, you have a financial cushion that allows you to stay on track, regardless of the circumstances.
If you find you do not expect to have the means to pay, communicate with your loan holders as soon as possible. (This is another reason to find out early who you owe). In some cases, a forbearance is a beneficial option. During a loan forbearance, you will not be required to make payments on your loan. However, it’s essential to realize that while your payments stop, interest on the loan continues to accrue.
If it looks like the change in your expenses or income is likely to last, research switching your repayment type. The many choices that are available can help you keep student loan payments manageable without risking late payments or defaults.
Reminder: There’s No Penalty for Paying Early
When you are in your grace period, consider making payments towards your loan. The more you pay early, the less principal will start costing you interest.
Throughout the life of your loan, look for ways to additional add-in payments to what your loan payment is each month. There is no penalty for paying early. Early fees can only help. Spending the most you can first means saving on interest in the future throughout the life of the loan.
Better Preparation Now for a Better Outcome Later
Research refinancing your student loans. Research can be beneficial if you are looking for a lower monthly payment or interest rate, maybe both. In some cases, you can choose to extend the life of your loan to secure lower payments. It’s essential to be aware that increasing your loan’s life will also increase the amount you pay in interest over the life of the loan.
It only takes a few hours of research and planning to maximize your grace period, but the benefits will last for years. Learning about your loans and making a plan means that you are in the best possible place to cut your student debt quickly and start building out the opportunities you have always dreamed of.