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Student loan grace period is not always what it seems to be

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After walking across the commencement stage, student-loan borrowers typically receive a little break from their lenders.

Most student loans come with a six-month grace period that gives borrowers time to get on their feet before they have to start paying their debts.

Some loans accrue interest while they're in a grace period, but others don't. That means for many student loans, when the grace period is over, six months' worth of interest is added to the loan principal, and that will increase the loan balance.

So, what's the takeaway?

Students are better off making extra payments during the grace period if they can afford to do so.

Running the numbers

Here's how the math works: The average college graduate in 2016 has $37,000 in student-loan debt, according to estimates by Cappex.com, a college and scholarship search site. Let's assume those loans are federal student loans. In fact, about 90 percent of student loans these days are provided by the federal government. The interest rate for federal direct student loans for undergraduates disbursed in the 2015-16 academic year was 4.29 percent.

So for a $37,000 loan at 4.29 percent, the interest accrued during the grace period is $794. That would grow the total loan balance to $37,794. Under the standard 10-year repayment plan, the grace period raises the monthly payment from $380 to $388, and the total cost of the loan by $981.

The costs of a grace period vary depending on the interest rate and the loan amount. Take the typical grad student. The average graduate school student has $57,600 in student-loan debt, according to New America, a nonpartisan public policy institute.

If that hypothetical student borrowed using a federal direct loan for graduate school, which had a rate of 5.84 percent last academic year, she would have accrued $1,682 in interest during the grace period. That extra interest would increase the monthly payments from $635 to $653, and the total cost of the loan would rise by $2,225.

Grace-period costs may be steeper at private lenders. For example, the average rate for a private student loan from Sallie Mae, the largest private student-loan lender, was 7.93 percent last year. Sallie Mae offers a free calculator to help borrowers determine how much interest accrues during their grace periods.

Interest doesn't accrue during the grace period for federal student loans provided to students in financial need, such as subsidized direct loans and Perkins Loans.

Making extra payments

Many lenders allow you to make payments during the grace period. The first step for borrowers is to contact their lenders and make sure they know when their repayment period begins.

"It's very easy to forget you have student loans with the grace period," said Mark Kantrowitz, publisher and vice president of strategy for Cappex.com. "It can sneak up on you."

If borrowers make extra payments, they need to tell their lenders where the additional money should go. Lenders will decide how extra payments are divvied up unless borrowers specify otherwise. Ideally, borrowers will want the extra money to go toward principal, not just their next payment.

"It's very easy to forget you have student loans with the grace period. It can sneak up on you." -Mark Kantrowitz, publisher and vice president of strategy for Cappex.com

Repayment benefit perks

More employers now are offering student-loan repayment benefits to their workers, which can help recent grads make extra payments before their grace periods end.

Just 4 percent of U.S. employers provide student-loan repayment perks, according to the Society for Human Resource Management, up from 3 percent last year. However, that number is expected to continue to rise.

More than 500 companies have expressed interest in rolling out student loan benefits to their workers next year, said Tim DeMello, founder and CEO of Gradifi, a platform that lets companies, including PwC, Connelly Partners and Western Union, pay off some of their employees' student loans.

With America's collective student loan debt growing beyond $1.3 trillion, such benefits will be valuable to many employees. They should check with their lenders to make sure those workplace perks are being properly applied to their loans. For example, Gradifi users must indicate how their repayment benefit will be applied to their loans.

Set up auto-pay

An easy way for borrowers to get a jump on student loan payments before their grace periods end is to make them automatic, Kantrowitz said.

Many lenders offer a 0.25 percent to 0.5 percent interest rate discount if borrowers automatically deduct student loans from their bank accounts. The federal government provides a 0.25 percent discount on interest rates for borrowers who use direct debit.

"With automatic payments, most borrowers quickly adjust their spending and avoid missing payments," Kantrowitz said.