Is your student loan grace period ending? Here's what to know

If you graduated college or left school in the spring, your six-month grace period for student loans is coming to an end. 

That means your loans will enter repayment, so your first payment will likely be due in October, November or December. 

For many borrowers, this is a stressful time. However, it's even worse this year. That's because lawsuits challenging the legality of various repayment programs have made it harder for borrowers to plan for and manage their loans.

So what should you do if your student loans are due soon? 

Step 1: Figure out what kind of loans you have

The biggest thing to do is determine what kind of loans you have: federal or private. Federal student loans are the most common and make up about 90% of all student loans. Private student loans are less common. It’s also possible to have both kinds.

If you don’t know what type of loans you have, you can log onto studentaid.gov to find information about your federal student loans. However, this won’t show any private loans you’ve taken out. To find those, you can access your credit report at www.AnnualCreditReport.com. It should list your current loan servicers.

Make sure to set up an account through all your loan providers before your payment is due. Verify that your correct email address, phone number and mailing address are listed. This will ensure you’ll get all your billing statements, important letters and notifications.  

Step 2: Figure out what you can afford to pay 

Once you’ve found your loans, you should see how much the payment will be and when it will be due. Now, you’ll have to decide if you can actually afford your payments.

If you don’t already know your current expenses and income, review them and see how much is left over each month. Then compare that amount to your student loan payment.

If the amount you owe is more than you can actually afford to pay each month, you might have a problem.

Step 3: Choose a strategy 

If you have private student loans, you may want to explore refinancing them to get a lower interest rate. When you refinance, you can also pick a longer repayment term, which may lower monthly payments. Make sure to compare refinancing offers and find a lender that offers the best combination of interest rate, monthly payment and total interest paid.

If you have federal loans, you’ll need to choose a repayment plan. The most basic question you'll have to answer is if you want to pay off your loans on time, early or take longer than normal. 

If you don’t choose a repayment plan, you’ll be automatically entered into the standard plan, which has a fixed monthly payment for 10 years.

“For many borrowers, that’s going to be extremely cost-prohibitive,” said Michael Dean, a consultant for Student Loan Planner.

This is why many recent graduates and other low-income borrowers select an income-driven repayment (IDR) plan. IDR plans base the monthly payment on your income, which can drastically reduce your monthly payment.

In 2023, President Joe Biden announced the creation of a new repayment plan, the Saving on a Valuable Education (SAVE) plan. This new plan offered much lower payments for borrowers, including 100% interest subsidies and a payment set at 5% of your discretionary income. If you had low income or no income during your last year of college, that could benefit you when it comes time to choose an IDR plan.

“For many graduates, they could theoretically have one or two years of $0 or low monthly payments, which enabled these graduates to focus on other things like their private school loans, their rent and more,” Dean said.

Recent graduates interested in the Public Service Loan Forgiveness (PSLF) program also need to be on an income-driven repayment (IDR) plan to qualify. The PSLF program forgives any remaining balance after making 120 payments while working full-time for a nonprofit or government organization. The payments do not have to be made consecutively.

However, this is where things get tricky. Recent lawsuits have derailed the SAVE plan, which is still in limbo. This means students who want to be on the SAVE plan cannot currently enroll and instead must choose another IDR plan. 

Here’s another catch: Many loan servicers are not processing new IDR applications, so borrowers are stuck between a rock and a hard place. 

Those who can’t afford payments on the standard 10-year plan have three other options: Choose either extended or graduated repayment plans (which don’t count toward PSLF) or submit a paper IDR application and apply for processing forbearance. Dean recommends choosing the income-based repayment (IBR) plan, which was set by Congress and is more permanent than other IDR loans. 

“Use USPS priority mail so you can confirm that they received it,” Dean said. “You can also submit it online through their portal. The second I submit that application, I would put my loans in processing forbearance.”

Dean says interest will accrue during processing forbearance, but theoretically that doesn’t matter while you’re working toward PSLF because any remaining balance will be forgiven tax-free.

However, processing forbearance doesn’t last as long as normal forbearance.

“The processing forbearance is for just 60 days,” said Mark Kantrowitz, author of “How to Appeal for More College Financial Aid.” “Hopefully, the court cases will be resolved within the 60 days. Note that interest continues to accrue during the forbearance.”

You can use the official federal loan simulator to help you decide on a repayment plan. Remember, only federal loans are eligible for PSLF. If you have a combination of federal and private loans, the latter will not qualify for PSLF.

Step 4: Set up automatic payments 

All federal loan servicers and most private loan services provide a discount if you sign up for automatic payments. This discount is usually worth 0.25% — not a lot, but better than nothing. 

Plus, signing up for automatic payments will ensure that you don't incur a late fee, which is even more important. Late fees for student loan payments can cost about 6% of your loan payment.

Bottom line

Dean said he and the rest of the Student Loan Planner team believe the SAVE plan will be eliminated and REPAYE will return. And it may take a few months for the courts to issue their rulings. Also, don’t be surprised if things change in the future, especially depending on who’s elected.

“Be open to the winds of Washington,” Dean said.