Using Your Grace Period Wisely

By: Jacob Newman, UHEAA


If you are going to graduate soon or drop below half-time, you will need to start thinking about repayment of your federal student loans. You must repay your loans, so it’s important for you know what repayment will look like when you leave school. Here are some common fears and misconceptions that many student loan borrowers have about repayment.

 

I am scared! Repayment sounds complicated!

 

Don’t worry! By law, your loan servicer must provide a loan repayment schedule that outlines when your first payment is due, the number and frequency of your payments, and the amount of each payment. Make sure you read this document carefully and contact your loan servicer if you have questions or concerns. Understanding it sooner rather than later will help you pay your loans successfully.

 

Do my loans have a grace period?

 

The grace period is the six month period after you graduate, drop below half-time, or leave school before you must begin repayment of your loan. This time period allows you to select a repayment plan that works for you. You are not required to make payments during your grace period, but it is a good idea to make payments.

 

Why should I make payments during the grace period?

 

Interest might accrue on your federal student loans while you are in school and during your grace period (if you have unsubsidized federal student loans). At the end of your grace period, that interest will capitalize, or, in other words, become part of the principle. Let’s take a simple example of Sally Student, who borrowed the maximum amount each year in unsubsidized federal student loans while she was in school from 2013-2018. Let’s take a look at how interest will accrue for her on her federal student loans. (See Table 1).

 

Table 1: Sally Student’s Federal Student Loans


Loan

Year

Interest Rate

Accrued Interest

$5,500 2013-14 3.86% $849
$6,500 2014-15 4.66% $909
$7,500 2015-16 4.29% $644
$7,500 2017-18 4.45% $334

 

Now take a look at the difference between paying during school or while in grace versus letting the interest capitalize (see Table 2). If Sally pays her interest before it capitalizes, she will save $1,235 on the standard 10-year repayment plan. That’s a lot of cash!

 

Table 2: Sally Student’s Federal Student Loans Interest Payments


Pay interest in school/in grace

Interest capitalizes

Total principal at repayment $27,000 $29,136
Total paid before repayment begins $2,136 $0
Total interest paid during 10-year repayment period $6,325 $7,560
Total payment throughout the life of the loan $35,461 $36,696
Total savings $1,235 $0

 

How can I make payments during my grace period or while I’m in school?

 

In order to make payments during your grace period or while you are in school, consider making yourself a budget. By making a budget, you can set aside the right amount each month to make fixed payments on your loan. Reach out to your assigned federal student loan servicer and ask them how you can start making payments. To find your federal student loan servicer, go to nslds.ed.gov and log in with your FSA ID.

 

Can I repay more than the interest that has accrued on my federal student loans during my grace period?

 

Absolutely! If you budget wisely and start making more in payments, you will be able to pay your loans more quickly and pay less in interest. Even a few extra dollars each month during your grace period can make a big difference in the long run. Remember to only pay what is within your budget since you have 10 years to repay your loans on the standard repayment plan. If you are having difficulty making the payments on the standard plan, contact your loan servicer to discuss different payment options.

 

Let’s take another example with Sally to see how paying more during your grace period can make a difference. Let’s assume that Sally doesn’t repay while she is in school but starts repaying when her grace period begins and pays a little extra. Assume that during her grace period she pays $400 a month. She decides to contact her servicer and have them apply the extra payment to the balance of her highest interest loan. After her grace period ends, she decides to cut back on her payments, but she still will have saved $1,302 over the life of the loan!

 

If she continues to pay $400 a month like she did during her grace period and applies it to the highest interest balance, she would not only pay off her loans a year early, she would also save about $2,387 over the life of her loans compared to letting the interest capitalize.

 

Table 3: Repayment During Grace of Sally’s Federal Student Loans


Pay interest in school/in grace

Continues same payment plan

Total principal at repayment $26,736 $26,736
Total paid before repayment begins $2,400 $2,400
Total interest paid during 10-year repayment period $6,258 $5,137
Total payment throughout the life of the loan $35,394 $34,309
Total savings $1,302 $2,387

 

Each situation is different, so it’s a good idea to contact your loan servicer to talk about the best way to repay your student loans. Remember that planning early can save you a lot of money in the long run!