Refinancing student loans is a good option any time you can get an interest rate that’s lower than your current rate. This could happen if your credit score has improved or if market rates have dropped. If you can get a lower interest rate on your loans during the grace period, you could save thousands over the loan term.
But let’s back up a bit and understand how it works first. There are a few major downsides to refinancing student loans during the grace period. You’ll want to weigh the pros and cons before making any decision.
The grace period is a payment-free period of time after graduation. It’s a window of time where you’re not obligated to make student loan repayments.
Lenders grant this grace period to give student borrowers time to get financially settled. They understand that it takes time to find a job and earn a decent income after graduation. Without a steady income, you won’t be able to pay back the money you borrowed. The grace period gives you time to find a job and start earning without worrying about loan repayments. Your payments start after the grace period ends.
Most lenders offer a grace period of six months but this could vary from one lender to another. Perkins loans offer a nine-month grace period. PLUS loans don’t have any grace period. It’s important to check your loan documents to determine the grace period for each loan.
The loan payments may be paused during the grace period, but interest accrual doesn’t stop. It keeps accruing right through the grace period. Interest starts accruing from the day the loan is disbursed and keeps accruing till the loan is paid off. By the time your grace period ends, you’ll owe more than you did when you graduated because of the accrued interest.
If you complete your college degree, the grace period starts from the day you graduate. If you drop out below half-time enrollment, the grace period starts from that day.
Refinancing means paying off your current student debt with a new private loan. The most compelling reason for refinancing at any time is to score a lower interest rate on the loan. Even a small drop in rate can result in substantial savings over the life of the loan.
You may be able to get a lower rate under two circumstances:
As we said earlier, interest continues to accrue right through the grace period. This accrued interest gets added to your current principal balance increasing your total debt. If you’re saddled with high interest-rate loans, the accrued interest during the grace period will increase your overall debt significantly. Refinancing with a lower rate could potentially save you thousands of dollars.
As good as it sounds, there are a few downsides to refinancing student loans during the grace period.
When you refinance, the benefits associated with the original loan may not get carried over to the new one. This stipulation may vary among lenders.
If you refinance during the grace period and if the new lender doesn’t honor the grace period, loan payments start immediately A few lenders may honor the grace period but most don’t.
Before choosing this option, you must weigh the benefits of the lower interest rate against the grace period termination. Only refinance if the savings are significant. Even more importantly, only if you can afford to make the loan repayments as soon as the loan is disbursed.
Every lender sets its own eligibility criteria for refinancing. Most will require you to have good credit, a steady income, and the ability to prove your income. You may not get approved for refinancing if you don’t meet these minimum requirements.
As a recent graduate, chances are you wouldn’t have had much time to build your credit score. That is unless you’ve been using a credit card through college. With a low score and thin credit history, your likelihood of getting approved for refinancing is low.
A few lenders may approve you even with a low credit score. But they will almost certainly quote a higher interest rate to compensate for the higher risk they’re taking. If you can’t get a lower rate it’s not worth refinancing your student loans during your grace period. You’ll come away without any benefits and lose the grace period too.
You have to be especially careful when refinancing federal student loans during the grace period. Refinancing can only be done through private lenders. When you refinance federal students with a private lender, the new loan is considered a private student loan. It loses all the protections associated with the original federal student loan. That means you won’t get access to income-based repayments, forgiveness, deferment, or forbearance options.
The grace period is too early to know what the future holds for you and whether you’ll get a job with a steady income. If anything goes wrong, the federal student loan protections could be a life-saver. It’s better to hang on to those at least for a while till you get truly financially settled.
The best thing to do in this case is to opt for a partial refinance. With a partial refinance, you refinance only your private student loans, not your federal loans. This allows you to benefit from lower rates on your private loans while still retaining the protections of your federal student loans.
Remember, refinancing requirements, terms, and conditions vary among lenders. Asking around is the only way to determine if you qualify and if refinancing during the grace period is the right decision for you.
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