Get ahead of the game: Reject the student loan grace period

A grace period has always seemed like a peaceful period. But if you’re playing your cards right, you should be aggressive during this time.

Wouldn’t it be great if you could pinpoint the exact moment your financial life went off the rails?

Of course, you have to be accepting of the fact that all financial lives get off the rails (to some degree) at some point. It could be a job loss or a car accident or even wonderful life events such as a wedding, the birth of a child or college graduation.

Looking back on these events, do you ever think about what you would have done differently (if anything)?

Maybe there was no way to avoid the financial reality you now face. Or maybe one small change could have set you down a completely different path.

As we are in the midst of college graduation season, a large group of 22-yearolds are unknowingly making one little mistake that will have them playing catch-up for decades. And the clock begins ticking the second they graduate.

Upon completing their final semester in college, many graduates are walking off the stage with a college degree in hand and into their student loan grace period — six months granted to those with federally backed Stafford loans. It’s meant to help a new grad secure financial footing prior to paying back the (average) $40,000 they borrowed to pay for college. The grace period is meant to help get a six-month running start at eliminating this debt.

The grace period also happens to be the point in which their financial life goes off the rails.

Imagine having close to zero income as you complete your college degree. If you’re one of the fortunate ones, you secure a job, move out of your parents’ home and begin your new, exciting working adult life.

Time slowly ticks by as you settle in and establish your financial habits. Each month you spend X on rent, Y on food and Z to get to work and back. Your income finds a way to fill in the unknowns and, before you know it, you have yourself a full-blown lifestyle.

Things are going well until you receive your first student loan bill, six months into your new life. It’s much larger than you remember your back-ofthe-napkin math calculating. It looks like you’ll have to make some small adjustments so you can afford this new, sizable monthly obligation.

But something has happened over this first six months of your working adult life — you established a lifestyle that can’t easily part with a few hundred dollars a month. To address the issue, you cut out savings contributions, go into consumer debt and scramble to make ends meet.

That’s what you think will fix the problem. But the new habits, established within the past six months, are tougher to change than you might think. A monthly shortage takes hold. And for many new grads, this moment is the beginning of some dark financial times.

Looking back, one small choice could have made this all-too-common story read a little differently.

That choice: Reject the grace period. When new grads ignore the ability to defer payment for six months, they set their new lifestyle taking their monthly student loan payment into account from the start.

Let’s say a new grad nets $2,500 a month after taxes, then sets his or her lifestyle around this number for six months. It’s going to be challenging to cram in a $500 monthly student loan payment when the grace period ends. But if she begins making payments right away (job and income permitting), she could create her lifestyle on $2,000 a month and prevent the struggle to afford the otherwise affordable payment six months from now.

Additionally, by beginning repayment immediately, a new grad can potentially prevent the student loan interest from capitalizing into the loan, by directing the early payments toward accrued interest repayment.

A grace period has always seemed like a peaceful period. But if you’re playing your cards right, you should be aggressive during this time. Because doing so will prevent the headaches that come with trying to change newly formed behaviors six months later, and more importantly, help avoid the financial struggles that often result.