Student Loan Grace Periods

When you apply for student loans, what do you need to know about the typical sixth-month grace period that comes with federal loans (and some other private loans)? According to a recent CNBC article, that grace period could end up costing you a lot of extra money in the long run. For some borrowers, it might make sense to take advantage of the grace period. For other borrowers, however, avoiding payments during the grace period can result in more debt later on, potentially putting you in a difficult financial situation. Keep in mind that it is extremely difficult to discharge student loans in bankruptcy in the event that you cannot make your regular payments. What do you need to know in order to make an informed decision?
Limitations of the Student Loan Grace Period
In short, if your student loans will accrue interest during the grace period, you may be better off making additional payments if you can. The only two types of federal loans that do not accrue interest during the grace period include:
  • Direct subsidized loans; and
  • Perkins loans.
Direct unsubsidized loans and Direct PLUS loans both will accrue interest during the six-month grace period, and depending upon how much you owe, this can add up to quite a bit of money. Private lenders rarely offer interest-free grace periods. To give you a sense of the total cost over the life of the loan, we should do some simple math. Currently, the average debt for a college graduate is $37,000. About 90% of student loan borrowers have federal student loan debt, which has an interest rate of 4.29%. If you do not pay anything during the grace period, you will owe an additional $794.00 in the long run.
That total is even higher for graduate students. On average, a student’s debt load after graduate school is $57,600. For federal direct loans for grad students, the rate last year was 5.84%. If you consider the interest rate over six months, avoiding payments during the grace period will increase the cost of your loan by $2,225.00. As the article points out, interest rates tend to be much higher with private lenders. For instance, the interest rate for private loans offered last year by Sallie Mae came in at 7.93%. If you do decide to make extra payments while your loans are in the grace period, you should contact your lender so that you can specify that the payment should go toward the principal of your loan (rather than toward the next payment due).
Employers Providing Benefits for Student Loan Repayment
If you need some help making additional payments during the grace period, your employer may provide student loan repayment benefits. While only 4% of current U.S. employers offer such benefits, “more than 500 companies have expressed interest in rolling out student loan benefits to their workers next year,” the article reports.
In the meantime, if you are having difficulty making student loan payments and have worked tirelessly to pay off your loans, you may be able to think about options for personal bankruptcy. A dedicated Oak Park consumer protection lawyer can discuss your situation with you today. Contact the Emerson Law Firm to learn more about how we can help.
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