After graduation — or if your college status as a student drops below half-time — your federal student loans will enter what’s called a “grace period.” During this time, which usually lasts six months, you don’t have to make payments on your student loans.
While this grace period may leave you breathing a sigh of relief, you might want to think twice about not making some sort of payment on your student loans. In many cases, there are reasons it could actually be a very good idea to start repayment right away, even if only a small amount.
Here are four reasons why you should get started on payments despite having a student loan grace period:
1. Interest charges will grow your balance
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.
If you do not pay the interest that builds on unsubsidized loans while you are in school and during the 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 are still in school (as well as during the grace period) in order to prevent capitalization.
However, if you need to borrow money to fund your education, it may not always be possible to make payments while you’re still a student. After all, if you could afford to make monthly payments, you probably wouldn’t need to take out student loans in the first place!
But 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 that’s during the grace period.
2. Budget for repayment before lifestyle inflation kicks in
If you get used to your new grown-up salary before you start making student loan payments, it is easy to allocate those funds elsewhere. In this case, your budget may feel a pinch once your grace period ends. But the sooner you start making payments, the less you will miss that money.
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 re-evaluate 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.
3. Figure out how much you can afford to pay
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 such as late payments and 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 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.
4. Pay your loans off faster
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 that 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.
Yael Bizouati contributed to this report.
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