Take Advantage of Your Student Loan Grace Period
Outside of a home, it’s very likely that a college education will be the largest purchase an individual makes in their lifetime. So large, in fact, that the act of taking out a student loan has for many become something of an inevitability, a twisted rite of passage into the real world. With each day that passes, a middle-class living seems harder and harder to sustain without a diploma to your name, and as a result, substantial loan debt is, ironically, now seen as a necessary evil on the path toward financial independence.
The “grace period,” or the time between graduation and the first required payment, is designed to soften the blow of these payments by giving you a reasonable time window to find financial stability. The size of this window varies, but the standard amount of time offered is around six months.
Grace periods are meant to be an asset—a much-needed opportunity for an individual to settle down before fulfilling their financial obligations. While most people manage to get themselves on moderately, stable financial ground during that time, there’s a growing minority that don’t. There are several reasons why this is, but my intention with this article isn’t to address the origins of the problem; instead, my concern lies with trying to fix it. What’s the first step? In my opinion, it’s to educate graduates on the proper use of their grace period and make them understand just how much of an asset the grace period can really be with a little extra work.
We reached out to some experts and asked them for tips on how a graduate can use their grace period to its full potential.
When you decide to buy anything substantial, do you always shop around first? Do you go to a couple different stores, check around on the Internet, maybe make a couple of phone calls to make sure you’re getting the best product for the best price? I certainly hope so! And I certainly hope that the larger the purchase, the more shopping you do.
In monetary terms, your student loan is most certainly going to be one your largest. So how come so many people don’t think to apply the same habit to loans as they do to everything else? Just as no two cars, two homes, two pieces of fruit at the grocery store are alike, each lender is going to have a slightly different offer with its own distinct advantages and disadvantages.
“I think it’s important to use that time to research and learn as much as possible about your loans,” says Stephen Alred Jr., founder of the planning firm Ignite Financial. “When you graduate there’s so much weighing on you that most simply pay their student loans without putting together a strategy.”
Do some research and find out exactly what you’re getting into. Pay attention to the specs of your potential loan. Make a spreadsheet and take note of the different requirements, interest rates, grace period sizes, and see which is best for you. Also, don’t make the mistake of narrowing your focus to just private lenders. The federal government offers student loans with very competitive rates for individuals who meet certain qualifications; if you qualify, don’t be afraid to speak up and do what’s best for your financial future.
Sketch a Plan
Amanda Abella, a regular contributor to MoneySavingPro.com, says, “Oftentimes grads don’t have a plan. They just start making money and hope everything will work out when the grace period is over.”
Obviously, this is very much the wrong way to go about things. In addition to researching the loan itself, you should make a serious effort to consider how you’re going make the payments of the plan you do end up choosing. What will your monthly payment be? What is your plan B in case your expected job offer doesn’t come to fruition? Does your loan give you any additional payment options you could take into consideration?
If there are other payment options, make sure you understand all the parameters. For example, some grace periods can be extended for up to three years (in addition to the standard six months) if a borrower is serving on active duty in the Armed Forces. In this case, repayment will begin after the grace period is over. However, the loan recipient must understand that you can only use the grace period once per loan—so if you go back to school after your grace period ends, that loan will not be eligible for a second grace period upon graduation. If you re-enroll after your service ends without taking this into consideration, you might have an unexpected payment waiting for you in your mailbox. Such a surprise could be easily be avoided with a little planning.
Understand Your Specific Rates
A very common misconception about grace periods is that, in addition to delaying payments, it also delays interest accumulation. In other words, when your grace period ends, you will owe the exact same amount as when your grace period began. If this is what you believe, you could not be more wrong.
“There are very few loans, very few, that don’t charge an interest during the grace period,” says acclaimed financial expert Robert Palmer, host of Saving Thousands and The Money Minute broadcast nationwide on The Kane Show. “Most are still charging interest; you can check your loan paperwork to see.”
What does this mean for you? Simple—if you have the means to start paying off your loan, you almost always should start doing so immediately. You may not like it, but the more payments during the grace period, the less interest you will accumulate, saving you thousands in the long run.
If you do happen to be one of the lucky few who doesn’t have to worry about interest during your grace period, even better! “If you’re in one of those rare loans that don’t charge interest and you’re making payments, then all of that payment is going to your principal, which is a great thing,” says Palmer.
For some, however, this may not always be the best course of action. While this will only apply to very few, there are graduates out there who, instead of paying off their loan, set their money away in a savings account to accumulate interest. For these individuals, immediate payment may not be the best option. Matthew Coan, owner of Casavvy.com, explains, “During the grace period you have for your student loans after graduation you have three options: you can spend the money you are making from your new job, you can save the money you make, or you can start making payments on your student loans. Spending the money you make may not help you get the most out it in the long run. Saving your money could work as long as the money you are saving is earning a better interest rate than what you are paying for your loan.”
To find out if this applies to you, simply compare the interest in your savings account with the interest on your student loan. If your savings interest is greater, then it will be in your best interest to delay your payments until the end of your grace period. This situation is quite a rare case, but it does happen. Again, it’s your responsibility to do your research and understand all the options available to you.
Of the experts we asked, Jason Hamilton of KISS Fee-Only Financial Planning had arguably the simplest financial advice of all: “Keep living like a college student.” Living modestly guarantees you’ll always maintain a degree of leeway through life’s challenges, whatever they may be. It allows you to cleanly separate your needs from your wants. Of course, you need to feed your family, of course, you need to pay your bills—but what do you absolutely need to maintain your standard of living? The more corners you can cut, the less painful your loan payment will be.
You don’t necessarily have to live on Top Ramen and cold pizza every day, but do you have to eat out at that nice Italian restaurant every night? Do you have to buy the brand new Mercedes, or can you settle for the used Chevrolet? Is that family vacation to Paris too tempting to pass up, or will the kids get just as much enjoyment out of a weekend at the local campground? It’s not easy to delay instant gratification for the sake of future benefits, but with a bit of willpower and ingenuity, a little savings can go a long way to guaranteeing a stable financial future.