The Definitive Guide to Student Loans

How the student loan 'grace period' can actually make your debt problem worse

A stressed out woman sits at computer.

The student loan "grace period" is a six- to nine-month reprieve from having to pay back your loans that starts from the time you graduate or drop below half-time enrollment. It's often touted as a gift to new grads who have yet to secure employment. But for many borrowers, it can have a costly downside.

If you wait until after your grace period ends to start making repayments on certain kinds of student loans, your debt can increase by as much as 20% from the time you entered school, according to Elaine Rubin, senior contributor and communications specialist at Edvisors.

That's because the interest on unsubsidized loans that begins accruing while you're in school continues to build for six more months or so and is capitalized at the end of that period, meaning it's added to your principal balance.

"In effect, you end up paying interest on top of interest," says Rebecca Safier, student loan expert at Student Loan Hero. That's a worst-case scenario for borrowers.

Grace periods can be even more costly if you have private loans because the interest rates are likely to be higher. You can use this calculator from Sallie Mae to estimate how much your debt could increase.

Here's what to do during the grace period to avoid that kind of unpleasant surprise.

Make payments on the interest

Experts suggest that you make payments on the interest as soon as possible, even during the grace period. If you can, start making payments right after your loans are disbursed — so, before you graduate.

"It could be a good idea to make small or interest-only payments while you're in school to prevent your balance from" growing significantly larger, says Safier.

How small is small? Safier's colleague, Andrew Pentis, a certified student loan counselor, says even a few dollars can make a difference. "Submitting as little as what they'd spend on a dinner out, say $15 to $25 [per month], could help to stop their balance from ballooning unnecessarily," he says.

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If you can't start while you're still a student, Rubin suggests you think of your grace period as a time to "attack" your interest. Since you technically will not have entered repayment yet — that comes once the grace period ends — you can send in smaller payments than the minimum monthly payments you will eventually be charged. It will be like you're getting a head start on paying off your debt, she says.

"A grace period is a great time to assess your situation, how much you've taken out and what your interest rate is," says Rubin. "If you're worried about how much you're able to pay and still live your life, really evaluate your budget and see where you can make adjustments."

Research repayment options

Your grace period is also a good time to take stock of all of your repayment options, says Rubin, if you haven't already. While most servicers will place you in the 10-year standard repayment plan by default, there are other options, particularly if you have federal loans. CNBC Make It breaks down your choices here.

An easy way to view your options if you have federal loans is to login to your account on

"Right there you can use the repayment estimator, which will give you an idea of what your payments will be and who your servicer is," says Rubin. It will also "tell you your repayment plan estimates for all of the repayment plans available to you."

If you have private loans, you will probably need to review your repayment options with your servicer.

Submitting as little as what they'd spend on a dinner out, say $15 to $25, could help to stop their balance from ballooning unnecessarily.
Andrew Pentis
personal finance expert, Student Loan Hero

Rubin says the standard 10-year repayment plan is ideal because, if you can stick to it, you'll pay off your debts faster than with, for example, an income-based repayment plan. But if that's too expensive — or if you are pursuing loan forgiveness — you should enroll in a different plan.

Finally, think of deferments and forbearance as last resorts. Both of these options allow you to put your student loan payments on hold for a period of time, though there are different eligibility requirements for each. The grace period is, in practice, a kind of deferment, Rubin says.

"If you're barely making it by paycheck to paycheck," Rubin says, deferment "is a protection." But rejiggering your budget to keep making payments every month or switching to a more manageable repayment plan are preferable options. That way, you can keep your balance from growing out of control.

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