Your Grace Period Is Ending—Now What?
College graduation can be a wild time. You go from juggling your last term papers and final exams (and graduation parties) to managing a career, often in mere months.
This period may be one of the most glorious—and confusing—transitions in your life. There is so much to learn about being an adult, especially in regards to managing your money. And learning this stuff is not an overnight process.
For many college grads, a good first step to successful money management is understanding student loans—including a loan’s grace period. If you have federal student loans, you may even be in your student loan grace period now.
For those of you that graduated in the spring, student loan grace periods may soon be coming to an end. It’s important to start there: What is a student loan grace period? And what happens when that student loan grace period ends?
Here are some tips for managing your student loans for the first time, including ideas on how to make payments once your student loan grace period is over.
What Is the Grace Period?
You may not need to pay your student loans back as soon as you graduate. This is due to a “grace period,” often only offered on some federal student loans.
The length of your student loan grace period depends on the type of loan. Direct Subsidized Loans and Direct Unsubsidized Loans have a six-month grace period before payments are due. PLUS loans do not have a grace period; they enter repayment status once they are fully disbursed. If you have Federal Perkins Loans, you’ll want to check with your school.
The grace period is designed to give you time to get settled after graduating from college and before making loan repayments. For many post-graduates, this is a time to find employment and get a handle on paying bills. You may also want to use your grace period as a time to make decisions about your repayment plan.
Managing Your Student Loan Grace Period
One important thing to learn is the difference between how Direct Subsidized Loans and Direct Unsubsidized Loans address the grace period.
With Direct Subsidized Loans, the government covers the interest that accrues during the loan’s grace period.
With unsubsidized federal student loans, however, interest will accrue starting the moment the loan is disbursed (you can make interest payments if you choose) through your grace period. At the end of the grace period, any unpaid interest is capitalized, which means that balance is added to the top of your existing loan, increasing the overall balance.
All future interest calculations will use this new balance, not your original balance—which means you’ll be paying interest on top of interest. (This is known as compound interest.)
If at all possible, you may want to make student loan payments during your grace period. Yep, you can do that. Even if you’re not able to make “full” student loan payments, you might be able to make interest-only payments. That way, you may not have to pay compounding interest. You may want to contact your loan servicer for options.
If you’re unable to make payments during the grace period, you may want to focus on choosing a repayment plan instead. The standard ten-year repayment plan is not your only choice; you may also wish to consider one of the multiple income-driven repayment plans.
If you’re working in the public sector, looking into the Public Service Loan Forgiveness (PSLF) program and seeing whether you qualify might be a good idea.
In making a decision about an income-driven repayment plan, you might consider the monthly payment you can reasonably afford and whether you’re aiming for loan forgiveness.
It’s important to understand the tax and interest ramifications of such plans, too. They may offer lower monthly payments, but could cost you more in the long run.
Managing Your Student Loan Payments
Becoming Your Own Best Advocate
Managing your student loans may feel emotionally draining. If your student loans stress you out, know that you are not alone. That said, avoiding your student loans may only cause more heartache.
It may be helpful to get in the habit of looking at your bill each month and familiarizing yourself with what you’re paying. Studying your statements can also be beneficial. If there is something you don’t understand, consider asking your loan officer or doing independent research.
This way, if something doesn’t look right, you can jump on top of the problem. Sometimes, errors are made, so you’ll want to learn to be your own best advocate. Never hesitate to ask for help understanding your loans.
Tracking Your Money
There’s no better time to learn how to track your spending than when you’re in your first full-time job. Not only are you potentially living on an entry-level salary, it may be your first time earning a steady income.
Typically, the goal is to create a budget that you can stick to (at least most of the time). But it’s difficult to create a budget unless you know how much money is coming in and going out.
You might consider spending at least two months watching your expenses like a hawk—by journaling, using a spreadsheet, whatever works for you.
Once you have a good idea of how much you’re spending in each of the major budget categories, you can create a monthly budget. Being realistic helps. It’s also helpful to remember to include a budget for both incidentals (unexpected expenses) and irregular expenses (like car insurance due every six months).
Setting Up Autopay
Setting up automatic payments for your student loans can help make it less likely that you’ll miss a payment. Late payments may result in penalties and could have an adverse effect on your credit score. If you don’t automate, you may want to consider setting multiple calendar reminders for yourself.
Additionally, you could look into automating all of your bill payments, not just your student loan payments. This money move may not only help you avoid missing payments, but also take a chore off your plate. You can use automation as a tool to simplify your life—and to-do list.
Avoiding Taking on More Debt
When you’re swiping a credit card at the local Starbucks it may feel like free money, but this couldn’t be further from the truth. Never forget that credit cards are only letting you borrow money that you’ll have to pay back, with interest.
Credit cards come with interest rates that are often pretty darn high; likely even higher than the rates on your federal student loans. That means, for example, that the cost of a pair of shoes or a vacation can eventually cost a whole lot more than their sticker price if credit card balances aren’t tended to.
One way to keep credit card interest costs in check is to pay your credit card balance off in full every month. However, if you’re having a difficult time managing monthly payments, you might want to consider taking a break from using your credit cards until you can pay them off and get better at sticking to a budget.
This isn’t always easy to do on a starting salary, but may be worth trying. (If you want to get rid of your credit cards entirely, there are pros and cons you may want to consider, as well as helpful procedures to follow.)
Refinancing Your Student Loans
If you have student loans—especially if you have private loans—another option you may want to consider is student loan refinancing. Refinancing is the process of paying off your current loan(s) with a new loan at a (hopefully) lower interest rate. Although refinancing typically won’t offer a lower rate on federal loans for someone fresh out of college, it may on private loans.
And a lower interest rate, even if it is just one percent or two, may shave big bucks off how much you pay for your loan overall. (That said, a lower interest rate may mean higher monthly payments. Our student loan refinancing calculator may help you figure out what this could mean for you.)
Refinancing won’t be for everyone; because refinancing involves taking out a new private loan, you would lose access to federal programs that offer protections and benefits specific to federal student loans, like income-driven repayment plans and PSLF.
If you have no plans to use a federal loan repayment program, or if you have a mix of both federal and private student loans, it may be worth checking to see whether a more competitive rate is available to you. With SoFi, no commitment is necessary to get a rate quote on a refinancing.
Lowering your monthly student loan payment is a great way to free up money for other goals—whether that’s paying off credit cards or saving up an emergency fund. That said, this may not be the best idea, as lowering your monthly payment may mean extending your loan term. Another possibility you could look into are options that would shorten your term, so you could potentially pay off your loan sooner.
Regardless of what you choose to do, staying on top of your grace period may help save you financial worry in the future—so you can enjoy this post-grad period, stress free.
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