For many recent college graduates, student loan repayment has not yet started. This is because most students will take advantage of their grace period, which is the period of time after graduation and before repayment begins. For the Direct federal loan borrowers, the grace period is the six month period from the month of their college graduation.
In some cases, it may be beneficial to start repayment before the grace period ends and not take advantage of the full grace period. To determine if you want to start repaying your student loans before the grace period is over a borrower will need to review and evaluate the type of loans they incurred and their current occupation.
For this article, we are not discussing borrowers who are going to continue their education with a post-graduate degree. The students who will be attending a post-graduate degree program may have their undergraduate federal loans remain under the in-school deferment classification. If this is your situation, I would recommend you contact the financial aid office and confirm that your current student loans qualify for deferment while attending the graduate program.
Where to start
The first step in the student loan repayment review involves the borrower taking an inventory of their student loans. What is unique about the student loan process is that the types of loans are more important than the lenders. Many student borrowers may have different loans from the same lender, which often can confuse the borrower and their repayment options.
To properly understand your student loans, the borrower needs to focus on the loan type and who is legally responsible to make the payments. Each loan needs to be classified as either a federal or private loans. After having the loan inventory properly classified, identifying your loan repayment options becomes much easier.
For federal loans, the borrower can get their list of loans on the National Student Loan Data System (www.NSLDS.ed.gov). To get access to the system the borrower will need their FSA ID. The second resource a borrower can utilize is a credit report. This source should list all of your outstanding loans both private and federal. By using both sources of information, a borrower should be able to create a complete inventory of all their student loans.
In some cases, a student may be responsible to repay their parents for a Parent PLUS loan. The Parent PLUS loans will be listed under the parent’s FSA ID and not the student’s FSA ID. This is because these loans are legally the parent’s loans, more specifically the parent who signed the promissory note.
For private loans, contacting your lender is a good start. As stated above, obtaining a credit report will list both their federal and private loan amounts.
Reasons to Start Repayment Before the Grace Period Ends
There are two situations where starting your repayment before the grace period ends might be a good idea. The most common situation involves the borrower who is considering using the Public Service Loan Forgiveness (PSLF) to repay their student loans. The second situation would be for the borrower who is trying to avoid the additional interest charges on specific federal student loans. Depending on the type of loans, some are accruing interest during the grace period.
To qualify for PSLF, the borrower must be a full time employee of an approved employer or the government. In addition to the full time employment, the person must make 120 on time payments. If you have begun your employment and plan on using one of the PSLF repayment methods, then starting the repayment before the grace period ends can be a good strategy. Starting right away allows the borrower to start accumulating their qualifying credits toward the 120 on time payment requirements. If they use their full grace period, they lose those few months of credit. Two common job occupations would be a school teacher or nurse.
The other situation that borrowers often do not understand is that some student loans have interest accruing during the grace period. This means that interest may be charged to their current loan balance during this time period. As I discussed above, having an inventory of your loans is important. If the majority of your loans are Direct Unsubsidized loans or private loans, the interest will be charged to the loan balance during the grace period.
As an example, if the student has $30,000 of loans and an average interest rate of 4.15%, a total of $620 will be added to the loan balance during the grace period. If you start repayment, this interest charge can be avoided or minimized based on the repayment method selected.
During college, you may have had to stop school for a semester or change your status from full time student to part time. Under the current rules, a student only gets one grace period. A student can still use the deferment option to delay their repayment if they used their grace period earlier. Many unknowingly use their single grace period during their college career and think they have a second grace period. If you are not sure, contact your college financial aid office or your loan servicer to get clarity.
This specific situation needs to be handled correctly because this could put your student loans into default if you are under the belief that you are using your grace period when in reality it was used during your college days.
It is my opinion, college funding and student loan repayment is one of the most complicated personal financial decisions a person will make. I believe it is important for the student and family to review yearly the student loans being borrowed and understand the debt amount needed to obtain that college degree. Part of this review should involve whether the grace period was utilized.
The lack of good comprehensive college funding and loan repayment advice is currently a problem. Most personal financial planners do not understand how the financial aid and loan repayment rules are intertwine. To add to this problem, college financial aid offices and loan servicers cannot legally provide personal financial advice. Become a better informed consumer by taking charge and understanding the amount of money you plan to pay and borrow for college. Review this against the occupation that you in the process of obtaining or have obtained. Both are important to review for your financial future and loan strategies.
Student loan debt is a big obstacle and can be stressful for the borrower. The two examples above show how thinking outside the box can provide some savings during the repayment process. Part of the EFC PLUS process involves providing advice to students, parents and financial professionals.