Why You Should Pay Your Student Loan During Grace Period
When you graduate from college (or transition to part-time status), you are given a six-month grace period before you have to start paying off your loans. For many, this is a godsend: hopefully, you can find your financial support before the first payment is due, thus reducing anxiety about money. But there is a good reason why you should make payments even during your six month break.
If you have federal unsubsidized loans, you will start to accrue interest while you are in school, which means that if you add six extra months to start paying them off, you owe significantly more than you do right out of school. And this is because this interest is capitalized, which means it is added to the principal amount of the loan. This way, you will pay interest on your interest. Capitalization also applies to private loans, although terms vary from lender, so you’ll want to check how this applies to you.
The federal government pays interest on subsidized loans during school and during the grace period. (Note that if your loan is deferred, you are responsible for paying interest on both subsidized and unsubsidized loans.)
“Interest capitalization is kind of a worst-case scenario when it comes to student loans,” says Student Loan Hero . “It can lengthen the loan’s maturity and cost thousands of dollars over the life of the loan.”
Edvisors , a platform for comparing private loans, says deferring a student loan while a student is in school could increase the total cost by 10 to 20 percent of the original loan. And if, for whatever reason, you need to postpone repayment again, you dig yourself more and more into debt as capitalized interest continues to accumulate.
To avoid this fate of interest spikes, ideally you should pay at least the accrued interest during the grace period. Plus, any small payment you may make while in school or within six months afterwards will ultimately benefit your bottom line, even if it’s a seemingly small amount.
It won’t be easy for everyone, but it will save you money in the long run. And, as Student Loan Hero points out, if paying only interest is onerous, that’s a sign that you should look into an income- based repayment plan so you don’t stretch too far beyond the grace period.