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.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.50% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.49% effective March 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.50% – 7.27%1||Undergrad & Graduate|
|2.50% – 7.12%3||Undergrad & Graduate|
|2.81% – 8.79%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.55% – 7.12%5||Undergrad & Graduate|
|3.00% – 9.74%6||Undergrad & Graduate|