Student Loan Grace Periods Coming to an End

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