Your student loan vacation period is over and it’s time to get back to work, now that your student loan grace period is coming to an end.
That’s the way it is with federal student loans and the end of your days on campus. The student loan grace period starts after you graduate (or drop below half-time enrollment). You don’t have to repay your student loans during the grace period, although you can if you want to. Typically, your student loan grace period lasts for six months after your college graduation.
That means if you graduated on May 20, count on your student loan repayment cycle to start ticking on November 20, when payments become due.
It’s a good idea to maximize your student loan grace period. You can and should take the extra time to look for a good job, prepare your finances for the long repayment slog ahead, and even get ahead of the game and start making those loan payments within the grace period (more on that below).
For starters, here’s a few things you should know about student loan grace periods. We’ll follow that up with some tips to take full advantage of your six-month student loan payment respite.
They’re mainly for federal student loans. Student loan grace periods are built into the loan programs offered by Uncle Sam. Most federal student loans offer a six-month grace period, but private lenders aren’t held to that obligation. Thus, if you have a private student loan, your first move is to contact your lender and see if there’s a grace period or not (and, if so, how long it is).
Your grace period may vary depending upon your academic standing. While most college graduates can count on a full six-month grace period after graduation, if you left college early or your course load fell below 50% attendance, your grace period may also start early, whether you know it or not. Talk to your student loan servicer to be sure when your grace period starts.
In most cases, student loan interest does accrue during your grace period – with a caveat. Don’t count on getting a break on the student loan interest during your grace period. With the exception of subsidized federal student loans, where interest is covered by Uncle Sam, count on the clock to be ticking on interest accumulation during your loan grace period. Any unpaid interest will be added to the loan balance when the loan enters repayment.
Taking Advantage of Your Grace Period – Right Up to “Pay-Up” Day
Now that you’ve got a good idea how student loan grace periods work, let’s dive in with some actionable tips to get you ready for your student loan repayment period – after your “payment vacation” time is up.
Know what will happen on your grace period end date. Take some time well before your student loan grace period ends and get organized before your student loan bills come flying into your in-box.
While your student loan servicer or private lender (in the event of a private student loan) will let you know your grace period end date and what you owe right out of the repayment gate, it’s a good idea to understand exactly how many student loans you owe, what you’ll have to pay in total every month, the interest rates on your student loans, and the names and contacts of your student loan servicers.
Preferably, get the name, number and email of a specific person on the other end of your loan. That’s helpful in establishing a relationship with your lender, and makes it easier to ask questions and check in on your loan repayment experience going forward.
Know how and what date every month you’ll make your payments. Most student loan lenders will want to debit your bank account directly on the assigned payment day every month. Not only will this save you the postage required to mail a physical check, but maybe you can get a discount from the lender too. Ask your loan provider if you can get an interest rate break by paying automatically via direct bank deposit.
Choose a repayment plan with the highest monthly payment you can afford. Use the grace period to take a good look at your income and budget, and strive to choose a loan repayment plan (your loan servicer will provide options) that allows you to pay as much as you can.
Why the bigger payments? It’s simple math. Like any large loan, the sooner you pay it off, the sooner you stop paying interest on your loan – and that saves you a bucket of money if you pay your student loan off as early as possible.
As usual, the numbers tell the story. Let’s say you have $30,000 in student loan debt, at a 6% interest rate, to be paid off in 10 years.
Under that scenario, you’ll pay $333.06 per month to pay the full amount over the 10-year period, paying a total of $9,967.38 in interest over the course of the loan.
But what if you could pay the entire loan off in seven years by paying an extra $100 a month? If you can pull that off (and it will take a lot of budgeting, discipline and saving) you’ll pay only $6,813.56 in loan interest. That saves you over $3,000 over the course of the loan – money you can use as a down payment for a new house or for your long-term savings.
Claim the student loan interest deduction on your federal income tax return. Once you do start paying down your student loan, and the sooner the better, start looking at extra ways to save money with your student loan debt.
Exhibit “A” is the federal student loan interest deduction on your tax returns.
As part of the Tax Cuts and Jobs Act of 2017, many tax deductions and breaks went the way of the dodo bird.
Not so for the student loan interest break and you, as a newly-minted student loan debt consumer, should take the full advantage.
That means deducting the interest you paid on your student loans during the tax year. The tax deduction is capped at $2,500 per tax return.
Note that if you’re married and filing jointly, you have to deduct the $2,500 in student loan interest as a couple. That’s one of several marriage penalties affecting student loans.
Figure out if you should consolidate or refinance your loan for maximum impact. You can also use your student loan grace period to re-evaluate your loan, especially to see if you can refinance into a lower rate.
Keep in mind refinancing federal student loans means a loss in many benefits – income-driven repayment plans, any federal forgiveness programs, generous deferment options, and more.
A loan consolidation is more complicated, with no shortage of “pros and cons”.
Basically, a loan consolidation does exactly what it says – it bundles your various student loans into a single loan, with a single payment, at a single interest rate, and with a single lender.
On the upside, consolidating your student loan streamlines your loan payment, could help you avoid default, protects your credit, and there’s no minimum loan amount to clear for a federal student loan consolidation.
On the downside, you may wind up paying more in interest over the course of the loan, can’t include private loans in any federal-sponsored student loan consolidation, lose the remainder of your grace period, and you can’t target the highest-rate loan for quicker repayment.
Talk to your loan servicer and a trusted local financial services professional (your parents or employer can likely recommend a good one) to see if a student loan consolidation works for you.
Other Moves to Make During Your Grace Period
You’ll also want to create a personal financial action plan during your grace period – that’s something you need to do no matter what your student loan situation, anyway.
Start with building an emergency fund of six months or so of savings, although three months will do in a pinch. That gives you an insurance policy of sorts that allows you to keep paying your student loan debt if you run into any financial difficulties down the road.
Keep going on that personal financial theme by keeping debt low (especially high-interest rate credit card debt), live within your means with a well-crafted budget (again, your parents or a local financial advisor can help), and stay in your parents’ home as long as possible (but definitely through the student grace period) to maximize savings.
Do all that and you’re well on the way to making the most hay from your student loan grace period – which is coming to a close likely faster than you think.