Student Loan Advice: What You Should Know About Grace Periods and Debt Consolidation

With all the excitement that comes with graduating from college, paying back loans is likely one of the last things you want to think about. Unfortunately, the weeks and months after graduation can be the most critical time for locking in interest rates and negotiating payments with their student loan lenders while the postgraduate grace period is still in effect.

Before you move that tassel to the left and toss your mortarboard in the air, check out this article about two important post-graduation loan concepts. If you plan ahead and understand your grace period and debt consolidation options, you're laying the foundation for a positive, stress-free loan payoff.

Grace Period Overview - Debt Consolidation Facts

Grace Period Overview

At its most basic level, the grace period for an education loan is the allotted time between when a student graduates or drops below half-time enrollment status and when he or she must begin making payments on the loan debt incurred during school. During this period, which typically lasts an average of six to nine months, borrowers can expect to receive repayment instructions from their lenders, as well as information about a due date for their first payment. It is best that students understand eligibility requirements and when the grace period starts and ends well ahead of graduation.

Am I Eligible?

Nearly all students who leave school with educational loan debt are eligible to enter a grace period before repayment on their loan begins. While it is most common for students to leave school due to graduating, others whose enrollment status may drop below half-time—or who drop out of school entirely—are also eligible to enter a postgraduate grace period.

How Long is My Grace Period?

Because the length of a borrower's grace period depends largely on the lender and type of loan received, students looking to find this information should re-read the promissory note they signed when applying for their initial student loan, which lists information about interest rates, repayment, and grace period length.

Students who took out Federal Stafford loan can be assured that they will have a grace period of at least six months before repayment begins, whereas those who took out Federal Perkins loans are given a nine month grace period.

Will Interest Accrue?

Whether or not a federal student loan continues to accrue interest during a grace period depends on whether it is subsidized or unsubsidized. Generally, those with subsidized loans will not be required to pay any additional interest that would have accrued during their six to nine month grace period. For those with unsubsidized federal or private loans, however, interest will continue compounding and must be paid back once the student enters into repayment.

What If I Need More Time?

For those who need more time before beginning repayment on a student loan—this is usually because recent grads have yet to find a steady job—a number of other options exist such as deferment or forbearance. These options can lengthen the amount of time before a borrower must begin repayment on an educational loan by another six months or more. Unlike postgraduate grace periods, however, deferment and forbearance may not be granted to all individuals, and it is important that those who hope to qualify for such options apply well in advance to avoid any additional charges or late loan payments.

Debt Consolidation Facts

For students with multiple educational loans, debt consolidation is a chance to combine their loans into a single account. When deciding whether to consolidate your student loans, it is important to do thorough research to make sure that it works with your particular financial situation.

What is Student Loan Debt Consolidation?

Student loan debt consolidation lets borrowers roll multiple federal loans into a single loan, thereby simplifying the repayment process. Instead of making multiple payments each month, borrowers who consolidate will have only one lender for all loans included in a consolidation loan.

The U.S. Department of Education offers Direct Consolidation Loans. It is free to consolidate loans and there is no minimum loan amount needed to qualify. Borrowers can opt for one of four different repayment plans:

• Standard Repayment Plan, in which a fixed monthly amount is paid until the loan is paid in full. Repayment takes between 10 and 30 years, depending on the amount to be repaid.
• Graduated Repayment Plan, which starts out low and then gradually ramps up every two years. This plan assumes that the borrower's income will increase over time. As with the Standard Repayment Plan, this plan assumes it will take 10 to 30 years for loans to be repaid.
• Extended Repayment Plan, which is applicable to borrowers with more than $30,000 in debt. Borrowers have up to 25 years to repay their loans through either a fixed or graduated payment option.
• Income Contingent Repayment Plan, which is based on a borrower's income, loan balance, and family size. This plan allows for as much as 25 years to repay loans.

Borrowers can also choose from a host of private consolidation firms. Consolidation terms and conditions vary with each company, so it is important to do your research before settling on a particular service provider.

What are the Advantages?

Student loan consolidation can make it easier for you to manage your debt, since you will only be making a single monthly payment. In addition, if you've exhausted your deferment options on your federal loans, consolidating your loans may renew many of these options. Deferment means a temporary postponement of payments due to pressing economic circumstances.

Consolidation loans may also decrease your overall monthly payment, since the minimum monthly payment on this loan could be less than the combined payments on your loans. However, this is not guaranteed for each borrower, so consult your consolidator for specific details.

Borrowers who consolidate also have the option to switch repayment plans at any time in the event that their financial situation changes. This lets borrowers stay consistent with their repayment. In addition, consolidation can spare your credit by preventing you from defaulting on your loans.

What are the Limitations?

If you choose to consolidate, you must consult current interest rates to decide when is best. Once you lock in an interest rate, you cannot change it – so it pays to wait until rates are competitive before consolidating. Finally, please remember that consolidation may not be right for your individual financial situation. Before making the choice to consolidate, consult a qualified financial professional.

Article Resources

Direct Consolidation Loans
Forbes
GoCollege.com
Stanford University – Student Loan Repayment Process
UCLA Student Loan Services