Graduating and getting your degree comes with a well-earned sense of accomplishment. Unfortunately, it can also come with a buzzkill: the scary realization that you have to start paying off all those student loans.
There is one reprieve, though: many loans have a grace period, or a time period "typically six months" between when you leave school and when you must begin making payments. For most graduates who graduate in May, the end of student loan grace period is quickly approaching in November. The grace period is designed to give recent graduates sufficient time to settle into a full-time job, establish themselves financially, and select the right repayment plan for their student loans.
But not having to make payments right away doesn't mean the debt is going away, so it's important for graduates to use the time wisely to get organized and familiarize themselves with their loans and the repayment options. Here are some of the tips to consider during grace period, which will help ensure that you are using the time as effectively as possible:
First and foremost, graduates need to be aware of whether their loans have a grace period at all. Most, but not all, federal loans have a grace period, and the grace period for private student loans varies from lender to lender.
Here is a breakdown of what to know about the grace period for different types of loans, both federal and private:
It's important to understand that if you have student loans that accrue interest during grace period, this interest will capitalize – meaning it will be added to the principal of your loan when the grace period ends. As a result, any payments you make toward your student loans during grace period will lower that amount, even if they are interest-only payments. If you choose to make payments on your loans during grace period, you'll end up paying less interest on your student loans in the long run because the amount of interest that has capitalized will decrease.
Once you understand the types of loans you took out and the grace period and interest accrual for each, it's time to organize all of your loan information and prepare to begin repaying your student loans. Here are a few things you need to do to prepare:
David Levy, an editor at Edvisors Network, recommends that you use the time during your student loan grace period to gather key information about your loans, including the contact information for your lenders, as well as the account numbers, interest rates, amounts owed and due dates for each of your student loans.
By organizing this information about your loans, you'll have a full picture of your loans and be well-equipped to determine the right repayment options.
Another smart move to make as you're getting your student loans organized during grace period is to sign up for automatic payments (autopay) for your student loans even before you begin repaying them. Not only will this give you peace of mind that your loans will be paid on time each month, but by signing up for autopay, your student loans could receive an interest rate reduction once they're officially in repayment.
The rate reduction amount varies from lender to lender, but Federal Direct loans, for example, receive a 0.25% interest rate reduction when autopay is used. Many private lenders, including CommonBond, also offer a 0.25% rate reduction with autopay.
Even though you don't have to begin paying back your student loans during the grace period, there are no rules that require you to use the entirety of the grace period before making your first student loan payments.
"If you're employed and ready to make payments, you can," says Anita Thomas, a senior vice president at Edvisors.
If you're in a position where you can allocate a certain amount each month toward student loan payments during grace period, getting an early start on paying back your loans during this time could be a smart move â€” especially as waiting can sometimes come with a cost; as noted above, interest accrues on Direct Unsubsidized loans, Direct PLUS loans, and on private student loans during the grace period, and that interest will become part of the principal balance, if you choose not to pay it before your grace period ends. Making interest-only payments on your student loans during grace period can help to offset this. Specifically, making interest-only payments on loans with the highest interest rates could be beneficial in the long run.
If you're in your grace period and have steady employment with a for-profit company, strong income and solid credit, it is worth looking into refinancing your student loans with a private lender like CommonBond.
Refinancing simply means replacing your existing student loans with a new loan, often at a lower interest rate, leading to real savings over the life of your loans. For example, borrowers who refinance their student loans with CommonBond save an average of $14,581.
If you're considering refinancing your student loans in order to lower your interest rate while in your grace period, make sure you understand how your new lender treats the grace period. For example, CommonBond will honor your grace period so that you can refinance to a better rate while beginning repayment six months after you complete your education.
It's important to keep in mind that refinancing isn't always the best option for every borrower. If the following circumstances apply to you and you have federal student loans, there are certain government programs you could benefit from that refinancing wouldn't offer:
If you're planning a career in public service or at a nonprofit and intend to work in that field for at least 10 years, you may qualify for the federal Public Service Loan Forgiveness program. After making 10 years of monthly payments while working full time in one of these sectors, the remaining balance of your loan is forgiven.If you're currently employed and your income is low enough that it would be a struggle to make the monthly payments on your student loans, the federal government's Income-Based Repayment (IBR) and Pay As You Earn (PAYE) plans are worthwhile programs to look into, as they involve paying only 10% of your discretionary income toward your student loans. While programs such as IBR and PAYE lower your monthly payments, it's important to note that you could end up paying more in interest over time on your student loans.
If these situations don't apply to you, you have steady income and want to save money on your student loans, refinancing is likely the right option for you.
While the student loan grace period exists to give recent graduates time to get financially settled and evaluate their repayment options, it doesn't necessarily mean you can't get a head start on repaying your student loans. Whether you choose to start paying early or not, the grace period is the perfect time to get organized and get the full picture associated with your student loans before the bills officially come due.