When you borrow student loans, you typically don’t have to pay them back while you’re enrolled in school or for six months after you graduate or drop below half-time enrollment. But even though you don’t have to, it could be a good idea to start paying your student loans during this grace period.
Since interest is accruing on most loan types while you’re in school and during your grace period, making small or interest-only payments can help prevent your balance from ballooning. In most cases, it’s beneficial to start making payments right away, even if only in small amounts.
Why paying student loans during the grace period can be smart
Here are four reasons why you should consider paying your student loans during the grace period:
While the government pays the interest on subsidized federal loans as long as you’re enrolled at least half time, unsubsidized loans begin to accrue interest from the moment you or your school receives the money. Most private student loans also start accruing interest right away.
If you don’t pay the interest that builds on your loans while you’re in school or during your student loan grace period after graduation, then that interest is capitalized (added to your principal balance).
Interest capitalization means you end up paying interest on your interest. This can add years to your student loan repayment period and cost you thousands of dollars over the lifetime of your loan.
Ideally, you would make interest-only payments while you’re still in school (as well as during the grace period) in order to prevent capitalization. Some lenders also suggest paying $25 per month to cut down on interest charges.
However, if you need to borrow money to fund your education, it might not be possible to make payments while you’re still a student. Still, if you can afford it once you’ve graduated or otherwise left school, then it’s high time to take control of your financial destiny and begin repayment, even if your first payment isn’t technically due yet.
Even if you can’t make payments while you’re in school, you might be able to afford them if you land a job after graduation. By factoring your student loan payments into your budget right away, you won’t be caught unawares when your grace period ends in six months.
This is a mistake my husband learned the hard way: When he figured out what his salary would be after graduation, he calculated the rent he could afford — without taking his student loans into consideration. Essentially, by not factoring in those student loan payments, his lifestyle inflation tracked his income.
Once his student loan grace period ended, he had a rude budgetary awakening. As a result, he had to reevaluate his original budget and reduce or eliminate many categories of spending. Even if you leave room in your budget for your upcoming student loan payments, having six months to get used to seeing that money in your checking account can tempt you to spend it. Allocating that money right away can help you avoid the fate of lifestyle inflation later on down the road.
Making interest-only payments during the grace period is also a good test run to determine whether you’ll be able to afford it when your full monthly repayment kicks in.
Suppose you have difficulty covering interest during the student loan grace period — that may be a clue that an income-driven repayment plan could be a better fit for your needs, lest you suffer a default under the standard repayment plan.
Knowing how much you can afford to pay will enable you to identify and enroll in the best payment plan for you sooner rather than later. And being on the right plan will, in turn, help you avoid negative consequences like late payments or default.
Determining how much you can afford to pay during your student loan grace period also gives you the opportunity to make other lifestyle changes. You could get a roommate to reduce your housing expenses, or start a side hustle to increase your income.
It is much better to find out what you need to do and take steps to implement those plans in advance, rather than find out after your student loan grace period has ended and your loans are due.
As mentioned above, making payments on your student loans during the grace period may save you thousands of dollars and take years off of your repayment period, helping you pay off your loans faster.
In addition to avoiding interest capitalization, you can make strides toward reducing your principal balance. Check out our prepayment calculator to see how much you could save by making extra payments during the federal student loan grace period.
It’s certainly tempting to skip those payments when you have the chance. But the fact of the matter is the sooner you begin making payments, the sooner your student loans will be paid off entirely.
Making a short-term sacrifice up front can get that student loan monkey off your back far earlier than if you wait. This could let you begin saving for other financial goals you might have, like buying a house, starting a family, traveling the world or saving for retirement.
For more repayment strategies, check out these 15 ways to pay off student loans faster.
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