Student Loan Grace Period: Clearing The Confusion

By Joseph Reinke, CFA CEO of FitBUX

When it comes to your student loan grace period, having a plan will save you a lot of money and put you on a good financial path going forward.

Many students and new grads are confused on two primary components of their student loan grace period when developing their plan:

1-First, do they have a student loan grace period?

2- If they do, can they make payments during their grace period?

This article discusses those two components but first, we define what the student loan grace period is.

What is a Student Loan Grace Period?

First off, what is a student loan grace period? Per studentaid.ed.gov: “The grace period is a set period of time after you graduate, leave school, or drop below half-time enrollment before you must begin repayment on your loan. The grace period gives you time to get financially settled and to select your repayment plan.”

How it works

One only gets a 6-month grace period, regardless of whether you have undergrad loans or grad loans. In other words, one doesn’t get a 6-month grace period after graduating undergrad and another 6-month grace period when finishing grad school. However, if, for example, you have a 2-month gap between undergrad and grad school, you can use 2 months of grace period during that time and then use the remaining 4 months after you finish grad school.

Interest on your loans gets deferred during your grace period. This means that the interest you owe is not simply “put on hold” during your grace period but 1) continues accruing instead and 2) at the end of your grace period, this accrued interest is capitalized, i.e. it’s added to the overall amount you owe.

Since the total amount you owe at the end of your grace period is itself subject to interest, you end up paying interest on your interest…that’s not good. We will come back to this and discuss how to minimize/eliminate this.

Do I Have A Student Loan Grace Period After Grad School?

Well…it depends:

Those who went straight to grad school from undergrad or only have grad school loans benefit from a 6 months grace period upon grad school graduation. During this grace period, they don’t have to start repaying their student loans. However, as mentioned above, they will continue to defer interest during your grace period. So, if they don’t do anything during their grace period, they will end up owing their lenders more money. I highly recommend having a plan and maximizing these six months to benefit yourself instead of your lender.

Those who had a short gap (less than 6 months) between undergrad and grad school can use part of their grace period during that gap and the balance of their grace period once they finish graduate school.

If you have used your 6-month grace period after undergrad, you're no longer eligible for a grace period once you finish grad school. However, you may be able to call your loan servicer and ask them to put you on administrative forbearance. Administrative forbearance will be 6 to 12 months and is similar to a grace period. Do not assume that your loan servicer is going to automatically put you onto it once you graduate though.

Can I Make A Payment During My Student Loan Grace Period?

The quick answer is… yes, you can. However, as we mentioned in a previous article, make sure that you have an emergency fund established first.

From there the key thing is how you make a payment. Your loan servicer may scare you and talk to you about accrued interest. Most people will then let the servicer apply the payment across all the accrued interest on all their loans. That sounds good, right? Well, no.

Mathematically this doesn’t make sense: to optimize your repayment strategy, you will want to repay the loan with the highest interest rate first. Now, there is one caveat: before paying off a given loan, you have to pay the accrued interest for that specific loan. Of course, you want 100% of your payment going to pay the accrued interest on that specific loan.

As you can see, there are a couple of steps to take to get this done right and you need to come prepared when calling your servicer. In addition, you should not assume that your loan servicer will do this right “by default”. You want to make sure that your loan servicer does that correctly because if they don’t it can cost you thousands (and make them thousands) in the long run.

About FitBUX, Inc.

If you need help making sure your payment is done correctly, then be sure to check out the FitBUX Student Loan Tracking Solution

If you are interested in developing a student loan repayment plan that is customized to you, you can visit www.fitbux.com and become a member today for free.

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