- 1 Grace Periods in Loan and Credit Card Contracts
- 2 How late student loan payments affect you
- 3 What is a late payment grace period?
- 4 Student loan grace period about to end? Here’s what you need to know
- 5 Graduating? Here’s What to Know About Your Student Loans
Grace Periods in Loan and Credit Card Contracts
A grace or interest-free period is a timeframe during which no penalty interest or late payment fees are assessed. It varies from one lender to another and depends on the type of loan or credit card of choice. It is an interest-free period provided that the balance is paid by the due date.
The grace period varies between 16 and 25 days or longer. There are different methods of charging and calculating interest, including daily accrual, two-cycle average daily balance, and previous, adjusted, and average daily balance. The interest rate varies, depending on the type of product and so does the grace period and penalty interest. Interest charges add up if you carry a balance. They are in the form of residual interest. Your card issuer may raise the interest rate as well if you are late on your payments. Late and missed payments often result in card cancellation, damage to the borrower’s credit score, and penalties.
Monthly Statements and Finance Charges
Credit unions, banks, and other providers bill statements on a monthly basis. Bills should be delivered to cardholders before they are due. The monthly statement shows the annual percentage rate on cash-like transactions and purchases. The length of time and due date should be specified in the credit card agreement. Even if the issuer offers an interest-free period, finance and interest charges apply if you make the minimum payment only. Interest begins to accrue unless you pay the balance in full.
Cash-like Transactions and Cash Advances
In general, cardholders don’t pay finance charges within the interest-free period. It is important to avoid cash-like transactions and taking cash advances. Money orders and wire transfers are examples of cash-like transactions. Balance transfers and convenience checks are excluded from the interest-free period meaning that interest begins to accrue immediately. Lenders charge different rates on purchases, checks, cash advances, and balance transfers.
Financial institutions feature credit cards and installment loans with a grace period. Some landlords also offer a window period during which rent must be paid. For example, the payment will not be considered late if made between first and tenth of the month. Tenants who are late face charges.
Student Loans and Insurance Policies
Borrowers who make payments during a period of forbearance, deferment, or grace benefit from reduced interest charges over the term of the loan. The payments they make go toward the principal balance. The outstanding balance is reduced when interest charges begin to accrue. Government student loans are one example whereby borrowers start making interest payments once they graduate, leave college, withdraw from their program, or drop bellow half-time enrollment. The grace period on unsubsidized and subsidized student loans is usually 6 to 9 months. Borrowers are also allowed to choose a repayment plan that suits their requirements. Debt consolidation is one option for students with multiple or excessive debts. In addition, students apply for health profession, dental, primary care, and other loans. The terms and interest rates vary. It is best to contact your loan officer and ask whether there is a grace period. The details are usually listed in the promissory note. Also check whether the loan is on a quarterly or monthly billing cycle.
Insurance companies also offer policies with an extended period after which premiums are due. It can vary from 1 to 30 days, depending on the insurer and type of policy, i.e. car, term, or life insurance. Extra charges apply if you are late, e.g. if you fail to make payment by the due date. Utility companies also assess penalty charges on late payments. In some cases, government agencies also extend the deadline for certain activities and services like choosing a healthcare plan.
While paying the balance in full sounds easy, studies show that only 42 percent of cardholders pay the full balance. Some 18 percent of consumers only make the minimum payment. Thus 40 percent of holders pay less than the full balance and more than the minimum, and interest charges add up. The problem is that the charges increase the cost of borrowing. For example, if you make $2,500 in purchases at 15 percent, you will pay $31.25 a month in charges.
Credit cards are issued by a variety of financial institutions, including financial companies, caisses populaires, banks, and others. This is a form of revolving debt that is used for the purchase of services and goods. The payments are collected by issuers at a later date. There is an.
Consumer debt is money owed as a result of buying services and goods. These items don’t bring profit and are consumed. Unlike mortgages, the interest payments on consumer debt are not tax-deductible. Consumer debt allows borrowers to pay their ongoing expenses (rent, phone and electricity bills).
A cash advance is a type of service that many credit card companies offer. Issuers charge a high interest rate, and there is no interest-free or grace period. This means that interest begins to accrue the moment cardholders withdraw money from their bank or through an ATM. The major benefit of cash.
How late student loan payments affect you
Have you ever wondered what would happen if you made one late student loan payment? Not being late every month, or every few months, but just one time? Perhaps you envision being scolded by some Sallie Mae rep, incurring devastating fees, or taking an immediate hit on your already fragile credit score. While these late payment scenarios may be exaggerated in your mind, there are nuggets of truth to each of them.
Understand the Difference Between Loan Delinquency and Loan Default
Fortunately for those with student loans, lenders understand that people make mistakes. Missing one payment and missing several payments are two different issues in the eyes of lenders, and are treated differently as well.
Loan Delinquency: A loan becomes delinquent the day after the missed due date. The loan remains in delinquent status until the borrower takes an action such as payment, deferment, or forbearance.
Loan Default: A loan goes into default when a person fails to repay according to the terms of the agreed promissory note. True, by being late on a payment, you are not adhering to the promissory note. However, there is a time lapse lenders and the federal government will allow before the loan is officially considered to be in default status. For example, most federal student loans will not be moved into default status until after the person has gone 270 days without making any payments.
Consequences of One Late Payment
For now, let’s assume that your loan is delinquent, and that you have only one missed payment at this time. The possible consequences of a delinquent loan include the following:
Ding on Your Credit Report: For Federal student loans, delinquency is typically reported to the three major credit bureaus (TransUnion, Equifax, and Experian) after 90 days has passed. The length of time afforded before reporting to a credit bureau is different for private loans and for each lender; for example, Sallie Mae usually reports delinquent private loans after 45 days. Usually if you are not 45 days late, you won’t incur a bad mark on your credit report—at least, not yet.
Late Fees: There is typically a grace period on delinquent loans before a late fee is assessed, though it varies by lender. Sallie Mae, for example, issues a late fee of 6% of your minimum payment after one late payment that is at least 15 days past your due date.
In order to find this information, I actually had to call Sallie Mae and ask—they don’t always make it easy to find. So be sure to call your own lender and ask the same questions so that you understand the consequences of a delinquent federal student loan versus a delinquent private student loan.
To Avoid Late Penalties, Be Proactive in Dealing with Loans
No one wants to miss a payment on their student loans, most of all because of the possible consequences that will occur. One of the best ways to prevent doing so in the future is by setting up automatic bill payment on your student loans that will debit your account before the due date. If you do this, be sure to understand whether or not your bank account will push a payment through or not in the event that you do not have enough funds to cover the debit (and if they do push the payment through, understand that you will incur overdraft fees from your bank with the upside being that you will not be late on your student loan payment).
Another way to be proactive when dealing with your loans is by keeping the lines of communication open with your lender throughout the repayment process. Instead of sticking your head in the sand and hoping for the storm to blow over, get in touch with your lender as soon as you know that you will need to make one late student loan payment. Hopefully you have had on-time and consistent payments up until now, as this could help you in making sure your delinquency is not reported to the credit bureaus or even to take off a late fee.
Just like when you are late on a credit card payment, the consequences of being late on student loan payments can be both financial as well as non-financial. Fortunately, there are grace periods for each of the consequences discussed.
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In this section
Filing returns and making payments
Failing to meet your employer obligations
What is a late payment grace period?
In December 2007 legislation was enacted which allows the Commissioner to delay charging a late payment penalty on an overdue amount in certain circumstances.
If this is the first late payment in a two-year period, a warning letter will be sent to the customer advising payment has not been made and giving a further date for payment of the tax.
If payment is made by this date, no late payment penalty will apply.
If payment is not made, the initial 1% and 4% late payment penalties will be added from the original due date. Any incremental late payment penalties will also be applied, if applicable.
All customers will start with a clean state from 1 April 2008.
The grace period will apply to tax due on or after 1 April 2008.
If an instalment arrangement is entered into before the due date of the tax, the grace period will not be applied allowing it to be used at a later date if required.
Student loan grace period about to end? Here’s what you need to know
If you just graduated from college, it’s a time to celebrate, take a vacation, and look forward to starting a lucrative career. At this point, your whole life is ahead of you, and the last thing you want to think about is anything having to do with school. But there’s one thing that won’t ever, ever go away, no matter how much you try to avoid it (not even by fleeing the country):
Your student loans.
That’s right. Remember that money you borrowed four years ago that allowed you to attend college in the first place? Now that you’ve got your degree in hand, you’ll need to pay it all back. Depending on the terms of your loans, that can take years, if not decades, of serious financial commitment; one 2013 research study found that the average student loan repayment period was 21.1 years long.
You aren’t required to start reimbursing your lenders right away, but your payments will be due before you know it. If you’re unprepared, you’ll be subject to penalty interest rates and run the risk of debt – kind of like cramming for a big exam and not studying properly for it.
Knowing how to deal with your student loans, whether they are federal student loans or private student loans, over the next year means assembling a timeline of goals and alternatives. Follow this timeline to kickstart your repayment process and be debt free in no time.
Get reacquainted with your loans
Federal or private? Subsidized or unsubsidized? Stafford or Perkins? It can be easy to forget what types of loans you borrowed, how many you have, or the amount of money you owe. Knowing the specifics is important, because each one may carry a different interest rate (especially in the case of private funds, where variable rates run amok), terms and repayment conditions. If you’re unsure what loans you signed up for, consult with the National Student Loan Data System for Students – the database allows you to view all the loans, grants and other financial aid you may have, the status of your loans, and your current enrollment.
Also, aim to get in touch with your alma mater’s financial aid department to confirm, especially for private loans, where no such database exists.
You’re not obligated to make any federal student loan payments for six months after graduating school. This "grace period" is a temporary reprieve from your loans for the express reason to find your financial footing when it comes time to enter a regular loan repayment schedule.
When researching the types of loans you have, look into the grace periods for each. Stafford loans traditionally carry a 6-month grace period, but some, like Perkins loans, carry 9-month grace periods, while PLUS loans have none at all. There are other exceptions, too: Stafford loans obtained between July 2012 and July 2014, for example, still accrue interest, which will be added to your principal when it comes time to pay up.
Other types of loans have different grace periods, while private loans typically don’t have grace periods.
If you don’t have one already, it’s never too late to start. If you have a job lined up with a full-time, salaried income, even better. There are many schools of thought and varying approaches to establishing the right budget, but one thing’s for sure: though a budget is mandatory, how you develop one is preferential. (We like the You Need A Budget method at PolicyGenius.)
Begin by simply tracking your monthly expenses and income. How much are you spending? Is there more money going out than coming in? Anticipate that your student loan payments will take up a big chunk of your budget; in fact, experts suggest reserving 31 percent of your budget towards loan repayments. If your current budget is still too restrictive, find creative ways to generate more cash, like taking on a side hustle, selling belongings you no longer need, or cutting back on discretionary purchases, like cable TV or Starbucks.
Try paying down interest first
For the unsubsidized loan holders, your grace period won’t stop interest from capitalizing on your loan balance. Take the first few months after graduation and try paying off some of the interest that has accrued, if possible. Don’t worry if you can’t tackle it all. What’s important is getting a head start before your combined student loan principal and interest become due after the 6-month mark.
At this point, your grace period will have expired, and it’s time to begin paying off your student loans. Now that you’ve got a line on your loans and configured a budget, explore some of these options:
Find the right debt payoff approach
This doesn’t mean getting too overzealous and devoting 100% of your take-home pay to your student loans. For the first few months, pay as aggressively as you can – and as much as you can comfortably afford – towards the loan(s) with the highest interest rates or largest balances. Also known as the debt avalanche method, by starting with larger debt and moving downward to smaller debt (like an avalanche), you’re attacking your debt head-on before interest has a chance to accrue and your debt becomes unmanageable. It’s contrary to the debt snowball method, where borrowers are encouraged to pay down smaller debt first and work their way up to larger debt. We’d encourage you to crunch some numbers by using a debt payoff calculator to see what you can afford.
Examine loan relief alternatives
If you’re having a hard time making your student loan repayments on your own at this point, the U.S. Department of Education can assist where federal loans are concerned. Consult with your lenders if you qualify for one of several public repayment plans, like Income-Based or Income-Contingent Repayment, or Pay as Your Earn, also known as the PAYE Plan. Most income-based options reserve a nominal percentage of your income towards you student loan debt. You might also look into pursuing a deferment or forbearance, putting a temporary halt to your student loan payments.
If you have Stafford loans with a standard, 10-year amortization schedule, consult with your lender about switching to an extended or graduated repayment plan; while stretching your payments to 25 years will leave you owing more interest in the long run, your overall monthly payments will be cheaper.
Consider refinancing or consolidating
Refinancing your loans with a lower interest rate, or consolidating multiple loans into one single loan with a lower, fixed APR, can ease the burden that exorbitant student loans can place on you and your finances in the years to come. Be careful about consolidating federal loans, however; they’ll be transferred into a combined private loan, which means you’ll lose several government-sponsored benefits attached to the original loans, like the above-mentioned repayment plans, or the chance to qualify for loan forgiveness.
Past the 1-year mark and beyond, if you’ve managed to make a dent in your student loans, don’t neglect other areas of your finances. As your career grows, increases and evolves, so should your income and the amount of money you set aside to save, even if it’s small amounts here and there towards an emergency savings. Try investing in a short-to-medium-term interest-bearing account – even a 24-month CD will do – and when the funds become liquid for withdrawal, take your compounded earnings and front them towards your debt repayments.
As a personal finance journalist, Paul specializes in financial literacy, loans, credit scoring and the art of negotiation. He's covered some of the nation's most inspiring financial success stories for national publications including CNN, and US News & World Report and has a passion for helping Americans overcome their debt.
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Graduating? Here’s What to Know About Your Student Loans
Whether the speaker at your college graduation is the Apple chief executive Tim Cook (M.I.T.) or the actress Eva Longoria (Knox College), the event signals the end of your undergraduate career — and moves you that much closer to having to repay your student loans.
Most federal student loans come with at least a six-month grace period, a time during which you don’t have to make monthly payments. For spring graduates, that means repayment is likely to begin sometime in November or December. That gives new graduates some breathing room — to find a job, rent or buy an apartment, or buy a car — before starting to make payments.
But many borrowers, despite studying hard to earn a degree, are uneducated about the type of loan they have, how long it will take to repay, what their monthly payment is likely to be and other important details, according to research from Prudential Financial. So they may be caught off guard when it comes time to begin repayment.
“There’s a lot of ignorance, unfortunately, and it causes people a lot of angst,” said James Mahaney, vice president of strategic initiatives at Prudential. He suggests taking simple steps, like creating a filing system for loan documents, to help keep on top of your obligations.
To help things go smoothly, make sure your student loan servicer — the company that sends you statements, collects payments and otherwise manages your loan — has your correct contact information. That means not only your street address, but also your cellphone number and email address.
You’re responsible for making sure your servicer knows how to reach you, even if you move, said Lauren Asher, president of the Institute for College Access and Success. If statements go to an old address, you may end up making late payments — and that may cost you in late fees and added interest.
It’s important to know if you have a federal loan (borrowed from the government) or a private one (borrowed from a bank or other lender). Federal loans typically have more consumer protections, including the option of flexible repayment plans if you have trouble affording your payments.
If you don’t know whether you have federal or private loans, or both, check on the Department of Education’s National Student Loan Data System, which lists federal loans. Loans not listed there are private, and you can usually get details about them from your college financial aid office or by checking your credit report.
Mark Kantrowitz, a financial-aid expert and publisher of college site Cappex.com, said that during the grace period, federal loan borrowers should choose a repayment plan, ideally with the highest monthly payment they can afford. The standard, 10-year repayment plan is usually the shortest and least expensive over all. Longer-term repayment plans lower the monthly payment but cost more in interest over the life of the loan.
The Department of Education offers a payment estimator tool on its website.
For some types of federal loans, interest accrues and is added to your balance at the end of the grace period. So it may be smart to make payments on those loans during the grace period, if you can, to help keep the balance from growing. Interest doesn’t accrue during the grace period on federal “subsidized” loans, which are based on financial need.
Also, Mr. Kantrowitz suggests having payments automatically debited from your bank account. You’ll be less likely to be late with a bill, and you may qualify for a bit of a discount — 0.25 percent, or 0.50 percent — as an incentive.
Here are some questions and answers about student loans:
What if I need more time before I begin repaying my federal student loans?
If it’s a short-term cash crunch, you can seek a deferment or forbearance allowing a temporary pause in payments. If it’s a longer-term problem, like a low-paying job, consider applying for a flexible repayment program, which ties monthly payments to your income, Ms. Asher said. A helpful online tool for applying for such plans, the I.R.S. Data Retrieval Tool, has been disabled since March, but is expected to become available soon. (The tool won’t be available to help borrowers complete the Free Application for Federal Student Aid, or Fafsa, an important financial aid form for those attending college, until the fall).
Do private student loans have grace periods?
Grace periods for private loans vary, so check with your lender. Sallie Mae, which services its own loans, generally has a six-month grace period, although some of its loans can have longer ones, a spokeswoman, Martha Holler, said. Sallie Mae typically sends out notices to alert borrowers that repayment is about to start — another reason to make sure your lender knows how to reach you, she said. Sallie Mae offers an online budget work sheet to help borrowers plan for repayment.
Do employers offer student loan repayment help?
Tuition reimbursement help is more common, but some companies offer student loan repayment assistance as an employee benefit, so it’s worth asking your employer.