Graduating or leaving school can feel overwhelming, especially when student loan repayment looms on the horizon. Luckily, many loans include a grace period—a temporary break before repayment begins. This grace period provides borrowers with valuable time to prepare for repayment and establish a financial plan.
This guide explains how grace periods work, the differences between federal and private loans, and how to make the most of this critical time.
What Is a Grace Period?
Definition and Purpose
A grace period is a temporary pause after a borrower graduates, leaves school, or drops below half-time enrollment. During this time, loan payments are not required. The purpose of a grace period is to give borrowers time to adjust to post-graduation life, secure employment, and organize their finances before repayment begins.
Who Qualifies for a Grace Period?
Not all loans offer grace periods. Borrowers with federal Direct Subsidized and Unsubsidized Loans typically receive a six-month grace period. However, loans like PLUS Loans require repayment to start immediately unless a deferment is requested. Grace periods for private loans vary by lender and may not be offered at all.
Grace Periods by Loan Type
Federal Student Loans
Federal loans provide standard grace periods for most borrowers:
- Direct Subsidized and Unsubsidized Loans: Six-month grace period after graduation or leaving school.
- PLUS Loans: No automatic grace period; borrowers can request deferment while in school or during other qualifying periods.
- Perkins Loans: A nine-month grace period, though this program is being phased out.
Private Student Loans
Private lenders set their own grace period policies. Some may offer a grace period of six months to a year, while others may require immediate repayment. It’s essential to confirm these details with your lender when you sign your loan agreement.
Special Circumstances
Certain situations, such as returning to school, entering the military, or facing financial hardship, may qualify borrowers for deferment options that extend their grace period. These options vary based on loan type and lender policies.
What Happens During a Grace Period?
Interest Accrual
Interest accrues differently depending on the type of loan:
- Subsidized Federal Loans: The government pays the interest during the grace period.
- Unsubsidized Federal Loans: Interest accrues during the grace period and capitalizes (is added to the principal balance) if not paid.
- Private Loans: Most private loans accrue interest during the grace period, increasing the total repayment amount.
Account Management
Borrowers should use this time to review their loan accounts. Verify contact information with your loan servicer, monitor interest accrual, and ensure you’re aware of your repayment start date.
How to Make the Most of Your Grace Period
Understand Your Loans
Review your loan types, balances, and interest rates. Contact your loan servicer to confirm repayment start dates and clarify any questions about your loans.
Set a Budget
Prepare for repayment by creating a post-graduation budget. Include estimated loan payments alongside other living expenses to ensure you’re financially ready.
Start Making Interest Payments
Making interest-only payments during your grace period can prevent interest from capitalizing, saving you money over the life of the loan.
Explore Repayment Plans
Research federal repayment options like Standard, Graduated, and Income-Driven Repayment plans. Use tools like the Federal Student Aid Loan Simulator to compare plans and choose the best fit for your situation.
Build an Emergency Fund
Allocate part of your budget to an emergency savings fund to cover unexpected expenses once repayment begins.
Consider Refinancing or Consolidation
Refinancing private loans during the grace period can help secure lower interest rates. For federal loans, consolidation can simplify repayment by combining multiple loans into one monthly payment.
What to Do When the Grace Period Ends
Set Up Autopay
Enroll in automatic payments to ensure on-time payments and potentially qualify for interest rate discounts.
Make Timely Payments
Start making regular payments as soon as the grace period ends. Consistent payments help you avoid delinquency and maintain a strong credit score.
Stay in Contact With Your Loan Servicer
Keep an open line of communication with your loan servicer to address any issues or changes in your repayment plan.
Common Misconceptions About Grace Periods
Myth: No Payments Means No Action
While payments may not be required during the grace period, borrowers should use this time to prepare for repayment by budgeting, selecting a repayment plan, and exploring cost-saving strategies.
Myth: Interest Doesn’t Accrue During Grace Periods
Interest accrues on most unsubsidized and private loans during the grace period, increasing the total repayment amount if unpaid.
Myth: Grace Period Extensions Are Automatic
Extensions, such as deferment for returning to school, must be requested and approved by your loan servicer.
Tips for Borrowers Without a Grace Period
Private Loan Borrowers
If your private loan doesn’t offer a grace period, contact your lender to discuss flexible repayment options, such as short-term deferment or interest-only payment plans.
PLUS Loan Borrowers
Parent and Graduate PLUS Loans do not include a grace period by default. Borrowers can request a deferment to delay payments until six months after graduation or leaving school.
Conclusion: Use Your Grace Period Wisely
Student loan grace periods offer a valuable opportunity to prepare for repayment and establish financial stability. By understanding how grace periods work and proactively managing your loans, you can reduce stress and set yourself up for long-term success. Take advantage of this time to budget, explore repayment options, and build a strong foundation for managing your student debt.