How Does the Student Loan Grace Period Work
Most graduates have a six month post-college grace period before they need to start making monthly student loan payments.
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And while it may seem like now is the time to find a job and get on your feet, it is important to know that interest on certain types of loans will still accrue during this period:
- Subsidized Direct Loans : No Interest
- Direct unsubsidized loans : interest accrual
- Direct PLUS Credits : Pay Interest
- Perkins Loans : no interest charged (grace period is nine months)
- Private Loans : Depends on your lender but will most likely charge interest (and may not offer a grace period – check your loan agreement)
As we discussed earlier, even if you don’t charge interest, but especially if you do, you should still try to make payments within those six months .
Let’s take a look at capitalized interest: Capitalized interest is interest that is added to your balance sheet and then increases the interest on its own. And if this is done during the grace period, you will potentially face hundreds or thousands of dollars in additional costs over the life of the loan.
This is how the math works, according to NerdWallet :
If you are a dependent undergraduate student who borrowed the maximum amount of unsubsidized federal student loans each year from 2014 to 2018, you would owe $ 27,000 plus $ 3,276 in capitalized interest. If you pay the accrued interest before capitalizing on it, your monthly payment will be more than $ 30 less and you will save $ 754 over the life of the loan.
In this case, if you paid interest before the end of the grace period, your monthly payments would be $ 274.44, compared to $ 306.02 if you did not. As you can imagine, the difference is much larger for private loans with higher interest rates.
This is not only a bottom line – it will also help you get used to the loan payments faster. Think about it: If you take a job after graduation, start budgeting for rent, food, etc., and then six months after that, you get another monthly bill of several hundred dollars, it won’t be a pleasant surprise. …
You can start paying only interest while in school or, again, six months after that, to avoid this fate. Be sure to indicate when you send grace period payments to your lender (see here for more details on how to do this ), otherwise they will choose how to apply the payments. If you pay interest, direct payments against the principal.