The grace period on a student loan is usually the six months following your graduation that is gifted to you to provide time for you to get a job and/or financially prepare to begin repaying your student loans. Although it sounds like a generous reprieve to not demand immediate repayment, there are significant and lasting side effects of this.

Interest Accrues, Even When The Bill Isn’t Due

For students who graduate with Direct Unsubsidized Loans or Direct PLUS Loans, the interest continues to accumulate during a grace period. And then, it capitalizes. This means that while you are not required to make a payment towards your student loan, the interest is still calculated each month during the grace period and then added into your loan balance. For the average undergrad, that’s 6 months’ worth of interest that is calculated and then added not just to the bill but to your principal balance. Which means once the grace period is over, you’ll be paying interest on a total balance of the loans you took out plus 6 months of interest.

Let’s Break It Down Now

To fully grasp the paying-interest-on-your-interest-on-top-of-your-loan conundrum, here is a break down of the math. Since over 90% of students take out federal student loans, the numbers provided below are based on federal student loan rates. *All calculations rounded to the nearest whole dollar.

Say you are an undergrad, graduating with the average student loan debt of $37,172 and an interest rate of 4.29%.

That comes out to $1,595 in interest per year or $133 in interest per month.

During the six-month grace period, that $133 will snowball into $798.

At the end of the grace period, your snowballed interest is added into your principal balance:

$37,172+ $798

Leaving you will a total debt owed at $37,970… and still at a 4.29% annual interest rate.

Assuming you take part in a standard repayment plan of 10 years, that means your monthly payment increases from $443 to $452 if you let your interest accrue during the grace period. It also means about an additional $1,140 over the life of the loan.

Big Difference

Now, paying an additional $9 per month may not seem so bad, that is if paying almost $450 in the first place is within budget. For individuals who returned to graduate school, that difference will likely be more significant since your student loan debt increases and the interest rises (average last academic year was 5.84).

Getting Help With Your Federal Student Loans

If you need help managing your federal student loans, The Student Loan Advisory provides a number of services including enrollment in repayment plans (some even based on your income), debt forgiveness, and student loan consolidation.