Understanding Your Student Loan Grace Period

It might sound like a free pass, but is it worth it?

Three Young Adult Male Students in Caps and Gowns Take a Selfie Photo After Graduation

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If you have student loans, you might have heard about what’s called a student loan grace period. It allows you to go for a certain amount of time after graduation without making repayments on your loan.

It might sound like a free pass, but make sure you understand all the details of the student loan grace period before you take it. While it could help you out if you’re in a tough financial situation after finishing school, it might not be the best decision for you. 

Here’s what you need to know about how student loan grace periods work. 

What Is a Student Loan Grace Period?

With many student loans, you likely won’t have to begin repaying them the day you graduate. Lenders know it could take a while to find a job and get yourself established after you’ve completed your education.

Your student loan grace period refers to the time after you finish your studies but before you’re required to start making payments on your student loans. 

When Does Your Loan Grace Period Start?

If you do have student loan grace period, it will kick in after your school changes your status to “graduated,” or if you leave school, or drop below half-time enrollment.

How do you know if you have a grace period on your loan? Most federal student loans do, except for Direct PLUS loans, which do not, and Perkins loans, which vary by school. 

If you have private student loans, you’ll need to check with your lender to see if you have a grace period and what its specific rules are regarding it. 

How Long Is a Student Loan Grace Period?

For most federal student loans, the grace period is six months. There are, however, some circumstances that could extend the grace period. For example, if you go back to school before the six-month grace period ends, then that six-month grace period will be given to you after you again graduate or leave your next period in school. 

Also, if you’re on active military duty for more than 30 days before your grace period is set to end, then the six-month grace period will be granted to you when you return from duty.

Your grace period can also be changed by consolidating your loan. If you get a Direct Consolidated Loan, your original six-month grace period will end and you’ll have about two months from the time you receive the funds from the new loan until you need to begin making payments.

For private student loans, you’ll need to check with your loan servicer, as there are many variations to the grace period. 

What Happens to Interest During your Grace Period?

Having a grace period usually doesn’t mean your student loan floats interest-free. If you have a federal unsubsidized loan, your interest will be capitalized after the grace period. When your interest is capitalized, that means unpaid interest is added to the principal balance of a loan, increasing the outstanding principal. So you’ll be paying interest on a new, higher amount. This could make the loan more expensive over its lifetime. 

Most of the time, interest on your student loan begins accruing during the grace period. 

If you have a Direct Subsidized Loan, the government will pay your interest while you’re in school at least part-time, during the grace period, and during deferment. An exception to this is the Direct Subsidized Loans that were dispersed between July 1, 2012, and July 1, 2014. 

Paying During Your Grace Period

Because the interest on your loan will likely be capitalized after the grace period, you might decide that you want to forgo the grace period and make payments as soon as you can. 

If you don’t quite feel like you have the monthly budget to start chipping away at the principal of your loan, you can make interest-only payments that will reduce the amount of interest that will capitalize after your grace period is over. 

Should You Take a Student Loan Grace Period? 

There are many factors to weigh when it comes to deciding whether you’ll take the student loan grace period. Find out what size monthly payments you can commit to right after finishing school. If you already have a job lined up and can create a budget. See if it would be reasonable to start making payments on your loan to avoid capitalization.

And, if you’re still job searching, consider whether you can make interest-only payments during the grace period while you look for a steady income.