Student Loan Payments During the Grace Period

With college graduations starting to take place, many students who have borrowed to pay for college are entering the 6-month “grace period” on their student loans. During this time, no payments are required. Woo hoo, right? Not so fast. If your loans are unsubsidized, then interest will continue to accrue through the grace period if no payments are made. At the end of the grace period, unpaid interest is “capitalized” or added to the amount of the loan. This increases your loan balance and will lead to larger monthly payments once your payment plan starts.

How does that work? Let’s say you have a $5,000 unsubsidized federal loan that you took out at the start of freshman year. Its interest rate is 4.66% and you have made no payments on the loan since taking it out. Each year, $233 in interest has accrued. If you do not make any payments during the grace period, an additional $116.50 in interest will accrue. That will add a total of over $1,000 in unpaid interest to your loan. Assuming you have a similar loan each year, you might be adding as much as $3,000 to your student loan debt by not making any payments until the end of the grace period. That might increase your total monthly payment by about $30 on a 10-year repayment plan, costing you an additional $3,600 over the course of loan repayment– about $800 of which is interest paid on interest accrued.

By all means, take advantage of the grace period if you must. But if you have any extra money to start making payments sooner, by all means get on it. You’ll save yourself thousands of dollars and be student loan debt-free sooner too.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s