Navigating the Student Loan Grace Period: A Comprehensive Guide

Following graduation, leaving school, or dropping below half-time enrollment, college students are granted a student loan grace period. During this time, borrowers do not have to make payments towards their student loans. This temporary break serves as a valuable opportunity for recent graduates and those transitioning out of school to secure employment and acclimate to their new financial situation before embarking on the repayment of their loans. In this guide, we’ll explore the student loan grace period, from its duration to tips for making the most of this payment-free window. 

Duration of the Grace Period:  

The grace period for student loans may differ based on whether a student has federal student loans, private student loans, or a mix of both.  

Federal Student Loans:  

• The majority of federal student loans, such as Direct Subsidized and Direct Unsubsidized Loans, come with a six-month grace period. Your student loan servicer will automatically grant you this grace period, so there is no need to make a formal request for it.  
• The Federal Perkins Loans have a grace period of nine months.  
• Parents who have taken out a PLUS loan for their child’s education do not receive an automatic grace period. However, they have the option to request a six-month deferment after the student graduates, withdraws from school, or enrolls less than half-time. On the other hand, graduate and professional students who have borrowed PLUS loans are granted a six-month deferment automatically.  

Private Student Loans:  

Private student loans differ from federal student loans in that they do not typically come with a set grace period. While many private lenders offer a six-month grace period, some may require payments while in school or immediately after graduation. It is important to check the original loan agreement or get in touch with the loan servicer to determine if a grace period applies to any private student loans taken out and how long that period lasts.  

Temporary COVID-19 Relief Measures:  

In October 2023, many federal student loan borrowers resumed payments after a three-year suspension due to the COVID-19 pandemic. To assist struggling borrowers in this transition, the federal government implemented the “on-ramp” repayment program. The on-ramp period, which is temporary, extends until September 30, 2024. 

Throughout this period, it is still mandatory to make student loan payments. However, if payments are missed, the Department of Education will not label the borrower as delinquent, and the loans will not go into default. Although borrowers may be shielded temporarily from severe consequences, interest will accumulate during the on-ramp period. Therefore, if financially possible, it is advisable to continue making payments as usual.  

Note: Only federal student loans that met the criteria for the pandemic-related payment pause are eligible for the transitional period known as the on-ramp transition.  

Consequences of Missing Payments:  

Not meeting the end of a student loan grace period can have serious repercussions. Firstly, missing a payment deadline can lead to added charges or penalties, increasing the overall cost of the loan. These fees can accumulate over time, making it more challenging to catch up and reduce the loan balance.   

Secondly, late or missed student loan payments can negatively impact one’s credit score. Payment history plays a decisive role in determining a credit score. Any missed or past due payments reported by a loan servicer to credit bureaus can result in a lower credit score, potentially affecting the ability to qualify for credit in the future.  

Continuing to neglect making payments towards student loans can result in the student loans going into default. Defaulting can have serious repercussions, affecting not only the ability to borrow but also a borrower’s financial situation. The outcomes of defaulting may include the following consequences:  

• The complete outstanding amount of the loan as well as any accrued interest must be paid in full immediately, known as acceleration.   
• The ability to request a deferment or forbearance is no longer an option, and eligibility for other benefits is forfeited, like the option to select a repayment plan.  
• Defaulted borrowers also become ineligible for further federal student financial aid.  
• The default is reported to credit bureaus, which is damaging to credit ratings and affects the ability to buy a car, a house, or to get a credit card.  
• It may take several years to rebuild a positive credit history.  
• It could be challenging to buy or sell assets such as real estate.  
• Tax refunds and federal benefit payments might be withheld and used to repay the defaulted loan through a process known as Treasury offset.  
• There is a chance of wage garnishment, which occurs when an employer must take out a specific amount from an employee’s salary and then transfer it to the lender to repay a loan that was not paid back.  
• Loan holders can take borrowers to court.  
• Court expenses, fees for collections, legal fees, and other expenses related to the recovery process may be imposed on the borrower who has defaulted.  

Making the Most of the Grace Period:  

The grace period on a student loan can be a stepping stone to financial stability. Here are five tips to help with making the most of this time to help ease the process of repaying student loans:  

1. Plan Your Repayment Strategy: Plan a strategy for repaying student loans efficiently. Utilize the grace period to get familiar with the specifics of each loan, including interest rates, balance, and expected monthly payments. Develop a budget that encompasses loan repayment as well as other financial obligations and desires.  
2. Explore Repayment Options: Apply for an income-based repayment plan if the federal loan payments are unmanageable. This type of plan adjusts the payment amount according to income and family size, making it easier to handle payments once the grace period is over.  
3. Start Making Payments Early: Consider starting to make payments early. During the grace period, interest continues to accumulate on most student loans, increasing the outstanding balance. By making payments during this period, the total interest that will be paid throughout the loan term can be reduced.  
4. Research Loan Forgiveness Programs: Explore the option of qualifying for loan forgiveness programs like the Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness. These initiatives have the potential to eliminate the outstanding balance on student loans after a specific number of eligible payments.  
5. Consider Consolidation or Refinancing: Think about consolidating student loans or refinancing student loans. Consolidating can simplify repayment by merging multiple loans into one with a single monthly payment. If the loans are private student loans, consider refinancing to potentially secure lower interest rates and monthly payments.  

FAQ about the Student Loan Grace Period: 

Can a Grace Period be Extended?  

Generally, the grace period for student loans cannot be prolonged, but there are certain circumstances in which federal student loans may be extended. For instance, if a borrower is called to active military duty for more than 30 days before the grace period ends, or if a borrower returns to school at least half-time before the grace period expires after leaving, they have the option to request an extension of the grace period.  

What if a Borrower Returns to School?  

If a borrower has federal student loans and they return to school on at least a half-time basis before their grace period expires, it will be reset. Once a student stops attending or drops below half-time enrollment again, they will receive another full grace period.  

Example: If a college student takes the summer off and uses only 3 months of their grace period, the grace period will be reset to 6 months after they return to school.   

Note: Different rules may apply for private lenders; it is advisable for borrowers to check with their lender to verify their specific policy.  

Can Payments Be Made During the Grace Period?  

Absolutely, it is possible to make payments during the grace period. It is highly recommended to make payments to minimize the accumulation of interest on a student loan balance.  

How Does Interest Accrue During the Grace Period?  

• Subsidized Loans: The government covers the interest on subsidized federal loans while the borrower is in school and during the grace period. This means that interest does not accrue during this time.
• Unsubsidized Loans and Private Loans: Interest continues to accrue during the grace period with unsubsidized and private loans. If borrowers do not make interest payments, the interest will capitalize and be added to the principal balance of the loan, increasing the total loan balance once the grace period ends. 

The student loan grace period provides a valuable opportunity for college students to transition into repayment smoothly and responsibly. By understanding the duration of the grace period, how interest accrues, and strategies for making the most of this time, borrowers can set themselves up for financial success and effectively manage their student loan debt.  

Ask Westface College Planning for Help

At Westface College Planning, our goal is to assist you and your family in creating a financial strategy for college and help guide you through the college payment process. If you have more questions about student loans and loan repayment, schedule a complimentary consultation with us today!