Open the door to student loan savings during your grace period
Unlock Savings during Your Grace Period
Congratulations on graduating college. As a student loan borrower, in most cases this means that your grace period clock has started. Now typically this means your first payment of interest and principal on your student loan is six months away.
By understanding how a grace period works, you can unlock saving on your student loans.
For student loands, grace periods are typically a period of six months when a student ceases to be enrolled at least half-time before repayment begins. The date the grace period starts is reported by your college. Most often this is the last day of the enrollment period, which is not necessarily your graduation day. For instance, the last day of the enrollment period is that last day of finals. If this date was Wednesday, May 8th, and the graduation ceremony was on Sunday, May 12th, your grace period clock started ticking on the former date.
On subsidized student loans, the interest is being paid on your behalf during your grace period. On unsubsidized student loans, the interest is still accruing. Any unpaid interest will be capitalized - that is the interest accrual will be added to the loan principal at the end of the grace period. If you borrowed the unsubsidized Direct Student Loans at the annual loan limit each year, this means you could be adding almost $3,300 to your loan principal!
Instead of continuing your loan repayment holiday, consider making some payments to save money. Spend some of your graduation gift from your aunt and uncle to paydown that student loan. Allocate some of that signing bonus to debt reduction. Budget some of your wages to diminish or dispose of the accrued interest. Live rent free with your parents a bit longer to eradicate student loans faster.
If you decide to make a payment before you are required to send one to your loan servicer, you need to be specific on how the money should be applied and to which loan. Some loan servicers’ systems assume prepayments are to be applied to future monthly payments equally for all your student loans, not toward interest accrual and/or principal on your loan from your first year of college.
To make certain that your prepayments are applied correctly, send instructions to your loan servicer on which of your loan(s) the prepayment should be applied to. Pay4 suggests that you direct prepayments to your most expensive loan first - that is the one with the highest interest rate. Once you have paid off any accrued interest on this loan, then consider moving to your next highest interest rate loan interest accrual. Then, the next one until all accrued interest is paid. If you get through all the interest accrual from your enrollment period and during your grace period, then start to tackle paying down your principal for your highest interest rate first.
Prepayments on student loans can be sent as one-time payments or can be a part of a standard payment using your specific loan servicers payment instruction processes. In fact, many servicers allow you to even set-up these special instructions when you set up automatic debt - - automatically withdraw your payment from the authorized bank account. By enrolling in auto debit, you may also qualify for an interest rate reduction of 0.25 percentage point on your loans during your required repayment period. This is another great way to save on your student loans and ensure on-time repayment.
Colleen MacDonald Krumwiede is a financial aid expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Pay4 to transform the way families afford college.