MML Alex: The Student Loan Grace Period

As you may have seen in my first post, I’ve got a fair amount of student loans to pay off. Yet when it comes to actually paying them off and how to do so, it gets blurry. I log into my account through my loan provider and immediately get bombarded with numbers and information, but couldn’t find key numbers and rules I was looking for, specifically my monthly payment. I have a good idea of what to expect from calculators and letters sent by my school, but I want to know exactly what it is, how it gets paid, and how it gets applied. Turns out a lot of this information isn’t available yet because I am still in the middle of the grace period for my loans. To get the answers I needed I decided to call my providers customer support and walk through it all from top to bottom. Great decision, and I learned a lot about the student loan grace period. Turns out it can make a huge difference in your loan repayment.

My grace period runs until November. On my phone call I learned that 30-45 days before your loan payment period begins, you’ll get a package in the mail from your provider with all the information you need. It will discuss your monthly payment, how you can pay, interest, etc. I asked the agent if I could end my grace period, because I am ready to start paying now. He said I can’t start my monthly payments yet, but if I want to I can make one-off payments.

Erm, what? Why wouldn’t they let me start paying when I want to? To me it was obvious, they want to drag it out to make more money off me! I was pissed. At least this is what I thought. Turns out I was wrong, and I shouldn’t want to end my grace period at all. The reason? Interest.

It’s going to get a bit technical here, so bear with me.

During the grace period, your unsubsidized loans are accruing interest (if you have subsidized loans, they won’t be accruing interest during the grace period). But, and this is key, they are accruing based on your loan principal, in my case the beginning $27,000 total. This matters because when your grace period ends, interest accrues each month based on your grand total including interest, not just your principal. Take a look at this picture of my loans. The grand total is over $30,000 if you include interest, but currently, it’s only accruing based off the principal amount. I’m accruing less interest now than I will after my grace period ends. So what does this mean for me right now?

Student Loans beginning 3-30-15It means the grace period is a great time to be aggressive. The more interest I can knock off through one time payments now, the more money I will save in the long run. Again, this is because after the grace period ends interest will accrue based on the total (including interest), not just my loan principal. FYI, if you are in this same situation, attack the unsubsidized loans during your grace period. They are the ones accruing interest.

So here’s where my mind is right now. I have three months left in my grace period, and around $3,000 in accrued interest. My goal is to get rid of it all before my grace period ends, saving me money once my loans become due. But this is going to be much easier said than done. If you remember back to my first post, I will have to buy a car sometime in the next couple months. So I could view this as a perfect time to not make payments on loans and save all the extra money towards a car. I’m struggling with the choice, and where my priorities lie. On one hand, I don’t want to have to finance a car, on the other hand I could save myself a ton of money by paying down my interest before the grace period ends. It goes even deeper than that too. Should I save and get a solid car that will last a while, maybe around $8,000-$10,000, or do I get a cheap car and run it into the ground? There are a lot of moving parts in this decision.

I’m honestly not sure what I’ll do yet. I need to get my budget in order first then figure out which strategy would be best. I’ll keep you in the loop. Not going to lie though, I thought my decisions would be a lot more cut and dry coming right out of school. This is getting complex very quickly, and it’s stressful.

Even with the stress, I learned a ton more about my loans and payment strategy from this phone call. More than enough information to deserve their own posts, so stay tuned folks. If you have any questions, are confused about this post, or just have something to say, comment below or email me at alex@petetheplanner.com.

Takeaways:

  • If you are in your grace period, make payments! It will save you money in the long run on interest.
  • Call your loan provider and ask them everything. Take them through your goals, your financial situation, and what they recommend. They are the best resource you will have. Do this early.

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