Once you’ve graduated or dropped below half-time status as a college student, any federal student loans you took out will enter what is called a grace period. Lasting six months, grace periods are a time during which you do not have to make payments on your loans.
While this fact may leave you breathing a sigh of relief, you may want to think twice about not shelling out money for you student loans. If you are able to, it is actually a very good idea to make payments during the student loan grace period after graduation.
Here are four reasons why you should get started on payments despite a student loan grace period.
1. Interest charges will grow your balance
While the government pays the interest on subsidized federal loans (as long as you’re enrolled at least half-time), unsubsidized loans begin to accrue interest from the moment they are disbursed.
If you do not pay the interest that builds on unsubsidized loans while you are in school and during the student loan grace period after graduation, then that interest is capitalized (added to your principal balance).
Interest capitalization is a kind of worst-case scenario when it comes to student loans because it means that you end up paying interest on your interest. This can add years to your repayment period and cost you thousands of dollars over the lifetime of your loan.
Ideally, you would make interest-only payments while you are still in school as well as during the grace period in order to prevent capitalization.
However, if you need to borrow money to fund your education, it may not always be possible to make payments while you are still a student. After all, if you could afford to make monthly payments, you probably wouldn’t need to take out student loans in the first place!
Once you have graduated or left school, it’s time to take control of your financial destiny and begin repayment as soon as possible, even if that’s during the grace period.
2. Budget for repayment before lifestyle inflation kicks in
If you get used to your new grown-up salary before you start making student loan payments, it is easy to allocate those funds elsewhere. This means that once your grace period ends, your budget may feel a pinch. The sooner you start making payments, the less you will miss that money.
This is a mistake my husband learned the hard way. When he learned what his salary would be post-graduation, he calculated the rent that he could afford to pay without taking his student loans into consideration. Essentially, his lifestyle inflation increased when his income did without taking into account his student loan payments.
Once his student loan grace period ended, he was in for a rude budgetary awakening! He had to reduce or eliminate many categories of spending more than he would have if he had considered those payments when he created his original budget.
Even if you leave room in your budget for your upcoming student loan payments, having six months to get used to seeing that money in your checking account can tempt you to spend it. Allocating that money right away can help you avoid that fate down the road.
3. Figure out how much you can afford to pay
Making interest-only payments during the grace period is also a good test run to determine whether you will be able to afford the full monthly payments at the end of that time.
Suppose you have difficulty covering interest during the student loan grace period. That may be a clue that an income-driven repayment plan will be a better fit for your needs than the default standard repayment plan.
Knowing this will enable you to identify and enroll in the best payment plan for you sooner rather than later. And being on the right repayment plan will help you avoid negative consequences such as late payments and default.
Determining how much you can afford to pay during your student loan grace period also gives you the opportunity to make other lifestyle changes. You could get a roommate to reduce your expenses, or start a side hustle to increase your income.
It is much better to find out what you need to do and take steps to implement those plans in advance rather than find out once your student loan grace period has ended and your loans are due. This calculator below can help you figure all that out.
4. Pay your loans off faster
As mentioned above, making payments on your student loans during the grace period may save you thousands of dollars and take years off of your repayment period, helping you pay off your loans faster.
In addition to avoiding interest capitalization, you can make strides toward reducing your principal balance. Check out our prepayment calculator to see how much you could save by making extra payments during the federal student loan grace period.
It’s certainly tempting not make payments when you don’t have to. But, the fact of the matter is that the sooner you begin making payments, the sooner your student loans will be paid off entirely.
Making a short-term sacrifice up front can get that student loan monkey off your back, and you can begin saving for other financial goals that are important to you, like buying a house, starting a family, or saving for retirement.
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