Finishing graduate school is a major accomplishment. It’s also a major time of change — and with the excitement of starting a new career and/or moving to a new location comes questions about how to tackle personal finances, including any student loan debt.
For the 47% of grad students with at least one federal student loan, the grace period after graduation offers a brief respite from repayment. Yet borrowers can choose to use this time wisely (or at least differently) by taking a few steps toward lessening their debt or shortening their loan timeline.
If you’re nearing the end of grad school, now’s the time to think about what those last few payment-free months can mean for your future. Here’s what you should know about the grad school student loan grace period and how you can set yourself up for successful repayment.
How long is the student loan grace period?
For most federal student loans, repayment isn’t required for the first six months after you graduate, leave school or drop below full-time status.
Some student loans require payments during school — essentially from the time the loan is disbursed, onward — so they have no grace period (though borrowers should check with their lender or loan servicer if they have any questions). If you took out both private and federal loans for grad school, review your loan terms to understand new payment obligations in addition to any you’ve already been meeting.
As you do, keep in mind that interest may have been accruing on your private and federal loans ever since your school started receiving the loan payments. So while a grace period means you’re not required to immediately start paying off your loan, the debt burden will only grow the longer you wait to begin.
Best practices for a productive student loan grace period
There are a few things you can do to prepare yourself financially for what’s to come:
1. Figure out what you’re in for.
The first step is sizing up your overall debt load, based on how much you borrowed and at what interest rates. For all federal loans — which set the fixed interest rates based on the then-current 10-year Treasury note — you can use the National Student Loan Data System to look up what you owe and the status of your repayments.
Your federal debt load depends on what types of loans you took out, when and for what course of study. Most grad students can take out up to $20,500 per year in federal Stafford loans, for example, but not more than $138,500 total across undergraduate and graduate school. Those in certain health fields have higher, more variable limits with Stafford loans, however, with a lifetime $224,000 cap. (Federal Direct PLUS loans and private loans, meanwhile, don’t have aggregate amount limits and are often subject to higher fees. With private loans, the interest rates you receive depend on the lender’s qualifications for borrowers and may include other products you have with the lender or things like your credit, income and undergraduate loans.)
As you review your grad school loan obligations before or during any grace period, it’s important to consider other financial obligations too. Did you start paying off your undergraduate loans during grad school, for example, or defer them? What do you owe on any car or home loans? Do you have outstanding credit card debt to pay down?
New expenses and cost considerations may affect how you think about your personal finances during your grace period as well. Keep in mind that things like business suits, interview travel, licensing exams and any required or recommended professional services may need to be factored into your budget.
2. Start thinking about your repayment strategy.
Armed with insight into your overall debt load and personal finances, you can figure out how long you want to spend in the repayment process.
When your grace period ends, you’ll likely begin making payments on your loan. Loan payoff periods are generally a standard timeline covering five, 10, 20 or 30 years. Assess how your plan’s specifics and repayment terms stack up to your current and future-expected income, as well as your goals for things like travel, home ownership, having a family or reaching a debt-free lifestyle.
If you want to change your payment timeline, contact your lender or loan servicer and review any options that may be available. Keep in mind that private loans may be less flexible when it comes to changing repayment terms.
You may be eligible for income-driven repayment plans on federal loans, for example, if your salary makes standard monthly payments too challenging. Alternatively, forbearance (for as much as a year), loan deferment (for up to three years) or forgiveness may be possible, depending on the terms of your loan and your individual circumstances.
For most borrowers, however, reducing their debt burden is about paying loans down wisely. First look at which debt carries the highest interest rates; it may very well be your grad school debt, as the rates tend to be higher than those for undergrad loans and you can borrow in higher amounts. Then craft a repayment approach that tackles higher-interest debt first — even if it means you’ll only be paying on interest to start. Look into loan refinancing options if you’re overwhelmed or uncomfortable with how your overall situation stacks up.
3. Consider your refinancing options.
If high monthly payments or variable private loan interest rates are going to make your debt obligations unmanageable, you can work with a bank or other private lender to refinance your debt into a new loan. The grace period can be a good time to take this step so that a manageable repayment strategy is fully in place as soon as you leave school.
Depending on your circumstances, you can refinance your student loans to a lower-rate loan or to shorter or longer repayment terms; what’s appropriate depends on your goals, income and plans. A good place to start is with First Republic’s student loan refinancing calculator, which shows rates in under a minute.1
Keep in mind that refinancing means a private lender pays off your existing loans and issues you a new private loan with new terms. Taking this step isn’t advised, however, if you want to maintain the potential benefits of your federal student loans (such as eligibility for forgiveness or income-driven repayment), as they are eliminated upon refinancing. Alternatively, certain borrowers are eligible to consolidate their loans through the federal government — though this forfeits any remaining grace period and doesn’t result in lower interest rates or any other savings.
Ultimately, the grad school student loan grace period gives federal borrowers an opportunity to start creating plans for their post-graduate lives and personal finances. It’s an ideal time to ensure that the relief of finishing school doesn’t lead to a need for debt relief later in life.
Whether your plans call for standard repayment, a revised timeline or potential refinancing, it pays to be proactive. Use your grace period to learn about your options and make plans that help you meet your goals.