Are you confused about your student loan grace period? You’re not alone. Many new grads feel frustrated and a little lost about how long their grace period is, and what exactly it means for their student debt. This is especially true of young professionals who have gone through additional schooling – like attorneys and physicians – because their extended time in school may have altered their grace period timeline.
The Difference Between Your Loans
Although student loan grace periods are anything but straightforward, you can translate yours by taking a look at what type of loans you’re currently carrying. There are two questions you need to answer to know how it affects your grace period:
- Whether your loans are direct loans or Perkins loans.
- Whether your loans are subsidized or unsubsidized.
Direct vs. Perkins Loans
Typically, people carry both direct loans and Perkins loans. For the purpose of this article, I’m talking about direct federal loans and Perkins loans (which are also federal). Perkins loans are provided to students who meet specific FAFSA requirements. They’re subsidized by the government, which means that the federal government pays any interest that accrues on your subsidized loans while you’re still in school, so long as you’re going at least half-time.
Your direct loans, on the other hand, can either be subsidized or unsubsidized. Subsidized direct loans still have financial need requirements, but often are open to a broader range of students than the much more strict Perkins loans. Unsubsidized direct loans are still federal, but the government doesn’t necessarily pay interest that accrues while you’re still in school. Both direct and Perkins loans are available to undergraduate college students, but only Perkins loans and Direct Unsubsidized loans are typically available to graduate students.
Perkins loans have a 9-month grace period, while direct loans typically have a 6-month grace period. Remember: you can only use your grace period once. So, if you took time off between undergrad and grad school and your grace period expired, you won’t have the grace period again for the loan after you graduate. Keep in mind that your loans are in deferment while you’re in school, so re-enrolling will “pause” your lender from collecting payments while you’re in grad school.
Unsubsidized vs. Subsidized Loans
Let’s dig in a little bit further to student loan subsidies. With subsidized student loans, your interest is being paid by the federal government while you’re in school at least half time, and during your grace period. However, some people choose to start making payments to their loans right away after graduation. Depending on where you are in life, this could be a great idea.
There’s often a fear that as soon as you start repayment you “end” your grace period, and interest starts accruing on your loans. For subsidized student loans, this isn’t the case. The federal government pays your interest through your grace period whether you start paying on the subsidized loan early or not. This means that if you do start to make additional payments on subsidized loans during your grace period, you’re paying toward the loan principal (not loan interest).
However, unsubsidized loans are perpetually accruing interest (daily!)- regardless of whether you’re in school half or full time, or whether you’re currently in grace period. So, if you chose to start repaying your loans during school or during your grace period, you wouldn’t “end” the grace period, because technically they were accruing interest all along.
Should You Take Your Grace Period?
You have the full 6 or 9 months to take advantage of this period, so do that. If that means getting your life together by getting a handle on your cash flow, creating a budget, or building up your savings, or starting to pay them off immediately and paying towards your principal.
For most people, taking advantage of their grace period makes sense. Getting settled after finishing grad school or residency can be overwhelming enough as it is – there’s no reason to throw student loan payments on top of everything else. During this time, there are several things you can do to find your financial footing before loan payments kick in:
- Get a handle on your cash flow.
- Understand any workplace benefits you may have, including a retirement savings account, health savings account, health insurance, etc.
- Start to build up your emergency savings.
- Build (and stick to!) a budget.
It might also make sense during this time to consider what type of repayment plan you want to sign up for. For some, an IDR (or Income-Driven Repayment Plan), may make the most sense especially early on in a career. Typically, this is true for people who may qualify for PSLF down the line, or aren’t making a notable amount of income directly out of college.
Are you ready to take action on your student loans? Want help understanding what you owe, and the best way to repay them? Contact us today! We’d love to help walk you through next steps.