Student Loan Grace Periods Coming to an End

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Last updated on July 23, 2019 Comments: 8

While all the focus has been on student loan interest rates. Congress has failed to renew one of the most important student loan benefits for undergraduates: the six-month grace period following graduation. With the rate of unemployment being historically high, this couldn’t have come at a worse time.

Federal student loans have a fixed interest rate of 3.4 percent across the board, regardless of degree or income potential. As of July 1, that interest rate was scheduled to double to 6.8 percent if Congress were to let the low rate expire. Both the President and the Republican candidate wanted to see Congress extend the low rate. The politicians obliged, but not without failing to renew other benefits. For undergraduates, there will be no more six-month grace period at graduation. For graduates, interest will not be deferred while in college.

Keep in mind these changes affect only new loans. If your loan originates on June 30, 2012 or prior, you still have these benefits. Only loans originating July 1, 2012 or later will be subject to the new rules and fewer benefits.

The six-month grace period was an automatic reprieve from needing to worry about finding money for student loans during the time recent graduates are making the transition into real adulthood. This transition involves finding and starting a job, finding a place to live, and possibly managing money for the first time. With the first payment for student loans due right after graduation, pressure is higher .

Parents who are concerned about their kids needing to move home after college rather than living on their own should now be more worried. Monthly student loan repayment may be a higher bill than rent, making it more difficult even for students who do find entry-level jobs in their fields. While mature employees in their fields might joke about recent graduates’ expectations for high salaries and immediate responsibilities, these will now be necessary in order to handle student loan payments right away.

There are, however, ways for recent graduates to avoid student loan bills until they have the financial wherewithal to handle the expenses. Forbearance allows you to stop making payments for a set period of time, although interest on the loans still accrues and is due. If the interest isn’t paid, it will be added to the loan balance. You can apply for forbearance, and the lender can decide whether to extend the benefit or not. Deferment is a benefit which must be granted if you qualify. Interest on subsidized loans will not accrue during deferment. Economic hardship and unemployment will help graduates qualify for deferment.

Deferment is the obvious replacement for the six-month grace period for those who qualify. For those who have jobs but are drowning in student loan bills, another option are income-based repayment plans. You can apply to have your monthly payments lowered, and lenders will generally grant this benefit. You extend the life of your loan and increase the overall interest you must pay, but for recent graduates struggling, selecting an income-based repayment plan now and paying more towards the loan a couple of years down the road when the financial situation improves is a solid option.

The six-month grace period was easy because it was automatic. Now students will need to apply for one of these options before they graduate in order to avoid immediate financial doom at graduation.

The above applies to loans for undergraduates. Loans for students pursuing graduate degrees did not have the six-month grace period, but they did benefit from deferment while in school. This deferment will no longer exist for new loans as of July 1, 2012, so graduate students will need to pay interest while enrolled in their degree programs. The unpaid interest will be capitalized (added to the balance) throughout the year, so borrowers will owe interest on interest, increasing the amount of money needed to pay off the loan overall.

If the only other option had been to increase student loan interest rates, this is a better choice, but Congress’s decision to remove these benefits shows that an affordable college education for every student who wants one is not a major priority. The decision to require students to start repaying student loans right after graduation at a time when college graduates — while still significantly better off than those without college degrees — are struggling to find jobs in their field paying a starting salary high enough to make those loans worthwhile puts the responsibility on the student to apply for deferment, forbearance, or an income-based repayment plan as early as possible. In other words, it’s not the end of the world, but it’s not the ideal solution.

The added financial pressure might be a good thing for some graduates, inspiring them to be creative in their attempt to start earning money in order to pay back their student loans on time. That might be a too optimistic view of the world, though.

Did Congress make a good decision, leaving interest rates the same while eliminating the six-month grace period for undergraduates and in-school deferment for graduate students?

Photo: jdg32373
Chicago Tribune

Article comments

Anonymous says:

Politicians are too focused on appearing sympathetic and understanding in the public eye that they fail to realize the true woes of college graduates. The six month grace period was an essential component in the transition from college to the workforce. It allowed fresh graduates to seek employment with ease rather than frantically searching for any job to offset the immediate accruement of interest on their student loans. It is a shame where these politicians are placing their efforts and need to realize the true issues of today’s society.

Anonymous says:

Reading this just made me incredibly sad for some of my younger cousins who are in college. I know that when I graduated from college, I would not have been able to afford all of the costs that would have come along with moving out of my parents house for work as well as student loans. From the pittance I was making as a translator, I would have had to choose between food and paying my loans. But, I’m lucky I guess. For my fiance, he came out of school with a rather high amount of loans. He was able to get onto an income based program with the government (since they were the ones who extended him the majority of his loans) and after 25 years, if it’s not paid off, it gets written off but he has to claim that as part of his income that year. I am not looking forward to that tax year since I know it’ll be a cringe worthy amount.

Anonymous says:

Congress made an awful decision. I personally know of two individuals who have always been responsible and lived on a shoestring so they could attend college. Now they are graduating and the only job offer they have had is from the local fast food places. Where are people getting the money to buy the fast food? I know that we cannot afford it. Sometimes I see no reasoning behind the things that politicians do but I think after a certain time they become another species.

Anonymous says:

First of all, it’s a good thing these kids are in college, they’ll need an education the figure this mess out! I can see a day when a lot of people are graduating near age thirty rather than just over twenty. College will now take a great deal of careful planning sprinkled with jobs in between classes. If I were at that age again I think I would be headed to a community college or a trade school. That being said, Congress has tough choices to make because we are in such a state of debt.

Anonymous says:

I actually see the loss of the 6 month grace period and the accrual of interest during grad school to be more of a drawback than the higher interest rate. The 3.4% interest rate was a temporary sweet deal; for years before this it has been higher. I am afraid with no grace period more students will default or their parents will have to pick up the tab for them.

Anonymous says:

As far as I know the sweet 3.4% was only for SUBSIDIZED federal student loans. My girlfriend has unsubsidized student loans and they are at 6.8% already 🙁

Anonymous says:

It’s a befuddled mess. Taking on student loans is a fact of college life. Either parents save for the college education or students are forced to take on loans. Maybe a rethinking of the use of student loans should occur. Is it really useful to take on so much debt for a career. Maybe a two year degree at a community college followed by a job to save money for future college might be an idea.
Something has to break for this student loan and debt problem. It’s a mess the government is perpetuating. The private debt industry knows it’s a lose-lose situation so they do not pursue the business. Only the government is in it because failure can be just bailed out.

Anonymous says:

I see three possible unplanned outcomes. First a potential slight decrease in overall student loan debt. While i don’t expect this to affect many just starting school i could see those nearing graduation or in graduate school will see the student loan debt come immediately due. This might encourage some to find alternative means of paying for education or even scare some away from graduate school. Who wants school and loan payments.

Two, better pre-graduation planning. If i have to start paying a bill right away i might be more diligent in landing a job upon graduation. People that used to graduate and then worry about a job may become people that line up a job before graduation.

I could also see this leading some to delay graduation. With i large student loan looming over my head i might decide that i should not put in to graduate until i have work lined up. Since i am not in the second group i’ll just keep going to some classes until that job lands in my lap. At that point i will graduate and move on with my life.