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Student Loans

What Is a Student Loan Grace Period?

A student loan grace period is the number of months between your college graduation (or whatever date you leave school) and your first loan payment due date. Most types of student loans have grace periods, but their duration depends on the loan provider.

It's important to know when to begin paying your student loan so you don't miss a payment. In the third quarter of 2019, 12%—or $155 billion—of federal student loans were in default, according to the Department of Education. When late payment information winds up on a credit report, it can seriously damage your credit scores.

You can avoid the negative consequences associated with missing payments by understanding your student loan's grace period, how to keep your loan in good standing and your loan's financing fees. Here's what you need to know.

Subsidized vs. Unsubsidized Student Loans

The U.S. government offers federal student loans to college students and their parents or legal guardians.

Federal direct student loans are either subsidized or unsubsidized. With subsidized direct loans, the federal government picks up the interest while you're enrolled in school at least part time, in a period of deferment or in a grace period. Unsubsidized direct loans, like private student loans, begin accruing interest as soon as you take out the loan.

Subsidized direct loans are available only to undergraduate students, while unsubsidized direct loans are available to undergraduates and graduate or professional degree students.

Parent PLUS loans are another type of federal unsubsidized loan and, like direct unsubsidized loans, they begin accruing interest immediately.

Is There a Grace Period for Federal Student Loans?

Whether there is a grace period on your federal student loan depends on the type of loan.

  • Direct loans: Six-month grace period. These loans may be subsidized or unsubsidized, but the grace period is the same for both. Many students carry a combination of subsidized and unsubsidized direct loans.
  • Parent PLUS loans: No grace period. PLUS loan funds go to parents and legal guardians to help finance their kids' college education. PLUS loans are always unsubsidized, so interest begins accruing right away. Although technically there is no grace period, the first payment is due within 60 days of the funds being disbursed.

Do Private Student Loans Have a Grace Period?

Many students supplement their federal direct loans with private student loans funded by credit unions, banks (traditional and online) or other financial institutions. Because they are not subsidized, private loans begin accruing interest as soon as the funds are disbursed.

Each private lender is free to determine its own rules regarding grace periods. Depending on the lender and the specific loan, you may have a grace period of six months or nine months before you start paying the loan—or no grace period at all.

Grace periods and all of a loan's terms appear in the initial loan agreement. If you're unclear about when you need to send your first payment and don't have the paperwork anymore, call the lender immediately and ask.

Do You Pay Interest During the Grace Period?

You can wait to make your first student loan payment when it's due, but that's not always the best choice. If you only have subsidized loans, there's no financial harm in letting the grace period run its course because interest isn't increasing your debt. If you borrowed $20,000 for your education with a subsidized loan, that's exactly the amount you'll begin paying off when the grace period ends.

On the other hand, if you have unsubsidized loans, interest will accrue during the designated grace period. You can wait until the grace period ends to begin paying on your loan, but you should try to pay off at least the accrued interest before that.

Why? Because it will stop the interest on your loan from capitalizing, which is when the interest that has accrued while you were in school and during the grace period gets added to your loan principal—costing you much more over the loan term. One of the easiest ways to pay your interest before the loan capitalizes is to send in monthly payments that cover the interest. Contact your loan servicer and make the arrangements.

How to Repay Your Student Loan

When you're getting ready to start paying off your student loan, keep these things in mind:

  • Prepare for monthly loan payments. Whether or not you jumpstarted the repayment process by sending in interest payments, once the grace period is up it's time to make your full loan payments. Review your budget and make room for your new monthly obligation.
  • Know the payoff term. Your student loan will have a fixed payoff term. For example, the standard term for direct loans and PLUS loans is 10 years. Terms for private loans are typically five to 20 years.
  • Use extra funds wisely. If you carry a mix of subsidized and unsubsidized loans and have some extra money to kick in, send it to your unsubsidized loan with the highest interest rate first. There's no reason to stretch debt out if you don't have to.
  • Defer or forbear if necessary. If the grace period clock on subsidized loans is ticking too fast and you don't have the money to start paying, consider a deferment. As long as you qualify, it allows you to hit the payment snooze button for up to three years, without interest being added. Forbearances are also a way to delay payments after a grace period is up. They're easier to qualify for, but interest accrues whether your loans are subsidized or not. Be aware, though, that deferments and forbearances are not available on PLUS loans or private student loans.
  • Communicate problems and ask for assistance. If you can't meet a payment's due date, contact the lender right away. There are alternative payment plans for direct loans. Even if you have the other types of student loans, lenders want to hear from you before you start to fall behind. Together you may be able to develop a feasible plan to offset credit damage.

A student loan grace period offers a helpful way for you to prepare for your upcoming loan payments. If possible, pay off your interest before the loan capitalizes, and then make all loan payments on time.

Consider getting a free copy of your Experian credit report to ensure your loan payments are being reported. Student loans may be the first loans you get—and managed properly, they can help build a long and positive credit history.