For many students, graduating from college means leaving school with a degree—and a pile of student loans. The typical borrower is now carrying on average $37,693 in education debt. Creating a plan for paying it off is essential—especially since you have, at best, only a six-month grace period after graduation before you have to start paying back those loans.
That grace period doesn’t go to everyone. Federal student loans allow a six-month window after graduation in which borrowers have time to prepare their debt repayment budgets. Private student loan lenders may or may not offer a grace period.
It helps to understand how the grace period works, so there are no surprises when it’s time to repay student loans.
- Student loan grace periods allow borrowers time to prepare to repay their loans before the first loan payment is due.
- Eligible federal student loan borrowers can enjoy a six-month grace period following their graduation from college in which to explore repayment plans and options.
- Private student loan lenders are not required to offer grace periods, though some may choose to do so.
- One possibility for managing student loan repayment is asking about tuition assistance or reimbursement from an employer.
Student Loan Grace Periods Explained
A grace period is a set period of time when no payments are due on student loans. For most federal student loan types, the grace period lasts for six months and applies when you:
- Graduate from college
- Leave school
- Drop below half-time enrollment
Again, this is a six-month window, but you may have up to nine months to begin repaying student debt if you have a Perkins loan. With federal PLUS loans, you do not get a grace period; instead, you can take advantage of a six-month deferment period if you graduate, leave school, or drop below half-time enrollment.
The purpose of the grace period is to allow time for borrowers to choose a loan repayment option and create a budget for repaying student debt. This includes the opportunity to explore income-driven repayment options.
For most federal loans, interest continues to accrue during the grace period. You can choose to pay the interest during this time, so that it isn’t added to your loan balance.
If you have private student loans, whether you have a grace period or not is up to the lender. Sallie Mae, for example, is one of the top student private loan lenders to offer a grace period. Similar to federal student loans, the grace period extends for six months after graduating or leaving school.
You can reach out to your private student loan lender to ask about grace periods and when or if they apply. If you have a grace period for private student loans, be sure to understand whether interest will accrue during that time.
Grace periods are separate from deferment or forbearance periods, in which you may temporarily pause payments to your loans due to financial hardship.
How to Use the Student Loan Grace Period
During your loan grace period, you’re not obligated to make any payments toward your loans; however, you have the option to do so, even if you’re only paying the interest. The advantage of paying interest is that you can prevent it from being capitalized and added to your loan balance.
If you’re in your grace period, or soon will be because you’re graduating or leaving school, the following checklist can help you make the most of it.
1. Determine what you can pay
Six months can go by quickly, so it’s important to know ahead of time how much you can realistically afford to pay toward your student loans. If you don’t yet have a budget in place, the grace period allows you time to create one.
First, look at your monthly income. Then, subtract all of your monthly expenses from what you make—or expect to make once you secure a job. This can give you a ballpark number of what you may be able to afford for loan payments.
2. Compare loan repayment options
If you have federal student loans, you may be eligible for one of several payment plan options. Typically, borrowers can choose from:
- Standard repayment
- Graduated repayment
- Extended repayment
- Income-driven repayment
The standard repayment plan calculates your monthly payments based on a 10-year repayment schedule. You pay the same amount each month for the entire ten years. Graduated repayment also follows a 10-year repayment schedule, but your payments increase over time. Extended repayment gives you up to 25 years to pay if you owe $30,000 or more in federal Direct Loans.
Income-driven plans base your monthly payment on your income and household size. The options include:
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
- Income-Sensitive Repayment
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
Your loan type, loan disbursement date, household size, and household income will determine the income-driven repayment plans for which you’re eligible.
The advantage of income-driven repayment is that you may end up with a lower monthly payment. The downside is that instead of paying loans off in 10 years, you may be making payments for 15 or even 25 years, and you’ll pay more in interest over the life of the loan than you would under a standard repayment plan.
Private student loan lenders are not required to offer income-driven repayment options, though they may allow you to make interest-only payments for a time or choose a graduated repayment plan.
Public Service Loan Forgiveness (PSLF)
Some of your loan balance may be forgiven at the end of the loan term. If you’re interested in federal Public Service Loan Forgiveness (PSLF), you’ll need to enroll in an income-driven plan.
The Department of Education announced on Oct. 6, 2021, temporary changes to the Public Service Loan Forgiveness (PSLF) program as a result of the coronavirus pandemic. Borrowers are now eligible to receive credit for past payments regardless if those payments were made on time or for the full amounts. In other words, past payments that were ruled ineligible under the previous iteration of the PSLF make count towards the 120 payment total.
Also, borrowers can receive credit for past payments regardless of the payment plan or loan program. However, all loans must be federal direct student loans or consolidated into a direct loan program by Oct. 31, 2022.
Similar to the previous requirements to the program, borrowers must have worked full-time for a qualifying employer when prior payments were made. Qualifying employment status includes those employed by the government, 501(c)(3) not-for-profit, or other not-for-profit organization that provides a qualifying service.
These changes to the program also allow active duty service members in the military to count deferments and forbearance towards the PSLF. For those who previously applied for the PSLF and were denied, the new changes include a review of previously denied applications that allow borrowers the ability to have their PSLF determination reconsidered.
3. Seek an employer that offers student loan help
If you’re heading out into the workforce for the first time, consider whether your prospective employer may offer help with student loan repayment. An estimated 48% of employers offer some type of educational assistance, which can include student loan refinancing, counseling, consolidation, and repayment programs.
When navigating interviews and job offers, be sure to ask about student loan refinancing or repayment assistance when discussing the benefits package. If you have one or more companies interested in hiring you, consider asking for student loan repayment forgiveness or assistance when negotiating a job offer.
4. Consider loan consolidation or refinancing
Consolidating student loans or refinancing them could make repayment easier once the grace period ends. Federal loans can be consolidated into a single Direct Consolidation Loan. This won’t reduce your overall interest rate, but it will leave you with a single loan payment to make each month instead of multiple payments to multiple federal loans.
Refinancing means taking out a new private student loan to pay off your existing loans. The purpose of doing so is twofold: You can reduce multiple loan payments down to one, and you potentially reduce your interest rate.
Keep in mind, however, that refinancing federal student loans into a private student loan can cause you to lose certain federal protections. For example, federal Coronavirus Aid, Relief, and Economic Security (CARES) Act protections, such as temporary deferment, do not apply to private loans, so it’s important to consider the tradeoffs of refinancing federal loans with a private lender. You also won’t be eligible for federal student loan repayment plans once you have a private loan.
The Bottom Line
The student loan grace period should be used wisely to create a debt repayment plan. If you’re not sure how you’ll handle loan repayment when the time comes, get in touch with your lenders or loan providers. They may be able to review your budget and income and help you come up with a solution for repaying student loans so that you don’t fall behind. And remember to compare student loan-refinancing companies if you’re interested in getting a lower rate on your loans.