Use the Grace You’ve Got

So you’ve just graduated and the last thing you want to hear about is the debt you’ve accumulated over the last 4 years.  Luckily for you, you likely won’t have to deal with your federal student loans for at least another 5 months or so.  Stafford Loans – subsidized or unsubsidized – give you a 6-month grace period after you graduate, leave school, or drop to less than half-time enrollment before you have to start paying them off, and Perkins Loans have a 9-month grace period.  You might not be so lucky if you went to graduate school and used the GradPLUS loans, however, and neither are your parents if they took out PLUS loans your behalf: the repayment period for PLUS loans starts immediately after you graduate.  In that case, you have probably already received several notifications in the mail.

But even if you don’t have to start paying your student loans for another 6 months or so, you should be thinking about your repayment strategy.  We will break down the pros and cons of different repayment options for you in a future post, but while you are in your grace period, here are three pieces of advice you should consider. 

  1. Subsidized loans.  There is no reason to pay off your subsidized loans right now.  Their interest is subsidized throughout the grace period, up until repayment kicks in.  So, if you have the money  to pay them off and have already decided to do so,  keep it in a savings account earning interest for the next 5 months and only pay off the loans towards the very end of your grace period.
  2. During your grace period.  Do not touch your loans while they are in the grace period (besides paying off unsubsidized loans if you want to, even though you are not required).  You can change your repayment options at any time and you will probably have a better sense of what you can afford and whether you might need to extend your repayment timeline or lower your payments towards the end of the grace period, once you have bought most of your furniture and have worked for a few months.  Also, if you consolidate loans that are still in their grace period with loans that are not, you will actually lose that grace period. 
  3. At end of your grace period.  When your grace period is running out, do not dump all of your savings into your federal student loans.  While you may choose to pay more than the minimum monthly payment, their rates aren’t high enough to warrant emptying your bank accounts.  You need a cushion, including for making future repayments.  Paying a little more in interest is always better than becoming delinquent.  

The bottom line: use the grace period you’ve been given.  If you have a 6 month period until you have to repay your student loans, use it.  And use some of money you make during that period to create a cushion for yourself – it may come in handy.