Here’s What You Need to Know About the Student Loan Grace Period

Once you’ve graduated from college, the quest to land a job, find an apartment and start your adult life can seem overwhelming. There are so many questions to answer and so little time to go searching for the answers.

For instance, you might start wondering when those student loans you took out actually need to be paid back.

Fortunately for most borrowers, there is a reprieve after graduation known as the student loan grace period, which functions as a temporary delay of required loan payments. Read below to learn how a student loan grace period works, when it ends and what it might cost you.

A student loan grace period refers to a time when payments are not due. Interest may still accrue during this time, but that depends on the type of loan you have. Most federal student loans have a grace period, and some private student loans do, too.

“The grace period for federal student loans begins the day after a borrower graduates, leaves school or drops below half-time enrollment,” says student loan lawyer Jay S. Fleischman, managing attorney at Shaev & Fleischman PC.

The definition of half-time status may vary depending on your school. For example, Indiana University—Bloomington requires undergraduate students to take at least six credit hours to achieve half-time enrollment.

During the grace period, interest will not accrue if you have direct subsidized loans but will usually accrue for other types of federal student loans, including direct unsubsidized loans and direct PLUS loans.

After the grace period is over, any accrued interest will be added to the loan principal in a process known as interest capitalization. Borrowers can also choose to pay interest during the grace period and reduce or eliminate how much is capitalized.

Here’s how much interest you might accrue during the grace period. Let’s say you owe $40,000 in student loans with a 5% interest rate. If you take advantage of the full six-month grace period, you will accrue about $1,000 in interest. If that interest is capitalized, your new principal will be about $41,000. That means your monthly payments will be based on the $41,000 and not the $40,000 you originally borrowed.

The student loan grace period is not the same as the COVID-19 emergency relief that has paused payments for most borrowers with federal student loans since March 2020.

Once that special COVID-19 relief ends, some students may see their grace period affected.

“There are certain activities that are supposed to happen six months before the loan normally enters repayment that may not have happened for students who graduated during the payment pause and interest waiver,” says financial aid expert Mark Kantrowitz, author of “How to Appeal for More College Financial Aid.” “So, it seems more likely than not that the restart of repayment will restore the grace periods.”

The grace period for student loans may vary. Here’s how long grace periods last for different kinds of student loans:

While direct PLUS loans technically do not have a grace period, they do have a six-month deferment period. While the six-month deferment period will kick in automatically for Graduate PLUS loans, borrowers with Parent PLUS loans will have to manually request a six-month deferment if they want it. Interest will accrue for both types of PLUS loans during the six-month deferment period.
Borrowers with federal loans can find their specific grace period end date by logging into their accounts on StudentAid.gov. Once you log in, it should say when the next payment is due on the main dashboard. You can also contact your particular loan servicer and ask when payments will resume.

If you have private student loans, contact the lender to understand what your grace period is, if you have one. You may be able to log onto your account and see when your first official payment is due.

If you do not have direct subsidized federal loans, making payments during the grace period can help you avoid interest capitalization and save money overall.

However, if you don’t have any kind of savings or emergency fund, it may be better to not make payments during the grace period. Instead, you could use this time to stash away some money for a rainy day. That way, you will have savings to cover your expenses in case of job loss, medical emergency or other crisis.

Also, if you have other loans with higher interest rates, it makes more sense to prioritize those instead of your student loans. For example, if you have a credit card with a 17% annual percentage rate and student loans with a 5% interest rate, then it’s generally better to pay off your credit card first.

To help determine the best approach for you, write down the interest rates for all your loans and credit card balances. You can use a spreadsheet to organize your loans and determine if you should pay off any other loans or credit cards before focusing on your student loans.

There are only a handful of ways to extend the grace period. Borrowers with federal loans who are called to active military duty for at least 30 days before the grace period is over will get the full six-month grace period once their active duty stint ends.

If you enroll in school at least part-time before the grace period ends, then you will receive the entire six-month grace period later on.

If you cannot extend the grace period, you may still be able to qualify for deferment or forbearance. Payments will be suspended during deferment and forbearance, though interest may accrue during deferment and always accrues during forbearance.

Deferment is only available for borrowers who meet specific conditions, such as borrowers who are going through cancer treatment or earning below 150% of the applicable federal poverty guideline.

If you are not eligible for deferment, you can apply for forbearance. Forbearance can last for up to 12 months at a time. You can usually renew forbearance for three years in total.

Borrowers who choose to consolidate their federal student loans during their grace period will immediately forfeit the remainder of their grace period.

If you still want to consolidate your loans, you can ask to delay processing until more of the grace period has passed.

You can make payments for your student loans through your specific loan servicer. If you have not already, you should create an account with your loan servicer. Make sure the servicer has your correct contact information including your email, phone number and physical address.

Even if you feel financially secure, it’s important to confirm that you can afford your student loan payments. Before the grace period ends, log onto your loan servicer and see what the monthly payment will be.

Then, look at your current income and expenses to make sure that the payments are affordable. You may have to change your spending habits to fit the student loans into your budget.

If you have federal loans and can’t afford your monthly payment, you can apply to use an income-driven repayment plan. There are four IDR plans. Three of them calculate your monthly payment as a percentage of the difference between your adjusted gross income and 150% of the federal poverty guideline for your state and household size. The Income-Contingent Repayment Plan, or ICR plan, has a slightly different calculation.

Low-income borrowers may even see a $0 monthly payment under an IDR plan. Being on an IDR plan and having a $0 monthly payment will keep you current on your loans while also allowing you some breathing room.

If you work for the government or a nonprofit, you may qualify for Public Service Loan Forgiveness, while eligible teachers can get Teacher Loan Forgiveness. Use the grace period as time to research your eligibility for these programs and learn how they work.

These forgiveness programs are different from the Biden administration’s plan to cancel up to $20,000 student loan debt, which is currently on hold.

Before the grace period is over, you can sign up for automatic payments. Borrowers with federal student loans can reduce their interest rate by 0.25 of a percentage point if they sign up for automatic payments. Some private lenders offer an autopay discount, which is also usually 0.25 of a percentage point.

Signing up for automatic payments can help you avoid late fees. Late payments can also decrease your credit score, which can hinder your ability to qualify and receive low interest rates on other loans and credit cards.