What You Should Be Doing During the Grace Period
Christina Slavonik, CFP® and YFP Team Member, joins Tim Baker to discuss the student loan grace period, why it’s not that gracious and what you should be doing during the grace period. They break down the differences between the grace period, forbearance and deferment and talk through scenarios you can consider when determining your student loan payoff strategy.
Summary
Christina Slavonik, CFP®, is back on the show to talk about how the grace period sometimes isn’t that gracious. The grace period on your federal student loans usually lasts 6 to 9 months and is the time between graduating from college and when you start making payments on your loans. This can be really helpful while you are looking for a job, but it should be looked at with caution. The problem is that interest accrued during this period is then transferred over to your principal balance, causing your balance to obviously increase as well as the interest on the loans. Behaviorally, a lot of people have a hard time avoiding lifestyle creep as they don’t have to make any student loan payments and then are hit with a surprise a few months later.
When the grace period is over, you automatically will be defaulted into a standard repayment plan. If your student loan debt is $160,000, a standard repayment plan will have you pay about $1,800 monthly. So what should you do during the grace period if you don’t want to fall into a standard repayment plan?
Christina suggests that establishing ground rules and assessing your job, situation and cash flow are the first steps. Then, you can formulate a repayment strategy. Tim and Christina talk through scenarios of a pharmacist seeking PSLF, non-PSLF forgiveness and an aggressive option. Christina reminds listeners to stick to a strategy once you understand them and pick one and to not get too comfortable during the grace period. Overall, Tim and Christina both iterate the importance of intentionality when determining a loan payoff strategy. They also discuss refinancing and consolidating your federal loans and the strategies and reasons for doing so.
Mentioned on the Show
- YFP Planning
- CommonBond
- LendKey
- SoFi
- Earnest
- Splash
- First Republic
- Refinance Your Student Loans
- YFP 051: 5 Steps to Crush Your Student Loans
- YFP 052: 8 Things to Do or Avoid to Evade Financial Purgatory After Graduation
- YFP 099: Key Financial Moves for Pharmacy Graduates
Episode Transcript
Tim Baker: Hey, what’s up, everybody? Welcome to Episode 107 of the Your Financial Pharmacist podcast. Christina, welcome back to the podcast. It’s been awhile since you’ve been on. How have you been?
Christina Slavonik: Doing great, yeah. Thanks so much.
Tim Baker: So a little update for the listeners out there, Christina, who I think came onto the team in March, she was actually out in Baltimore in YFP Planning headquarters, and we spent a week last week kind of just doing some training and just working together, side-by-side, which I think was fantastic. I feel like anytime we can get in person, not just on the YFP Planning side but just with the Tims and everything, it’s always a good, productive use of time. So yeah, how was your visit to Baltimore?
Christina Slavonik: It was wonderful. Yeah. Baltimore, I just love the history, of course. And you and Shea were very hospitable. And got to have some crabs, I’ve never had to open crabs before, so thank you to Paul Eichenberg and his wife Anne for being so patient. I think I was a fast learner, but yeah, it always helps to have a good tutor to help you with that.
Tim Baker: Yeah, so we pick crabs with Paul on one of the evenings Christina was here. And it was out on the water, it was beautiful, so yeah, big props to Paul and his wife Anne for hosting. That was fantastic. So Christina, we’re going to talk about the grace period. And for a lot of those out there, we talk about the grace period as something that maybe isn’t as gracious as one would think. And really, what we’re talking about is really that waiting period between graduation and when you actually start your loan payment. So for a lot of people, this is going to be, for their federal loans, it’s going to be six months. If you have Perkins loans out there, it could be up to nine months where you’re actually not on the hook for any of the payments that are out there. There are some exceptions out there that if you are in the military or something of that sort, you know, you can actually get a longer grace period. The problem is during this period of time, the interest that is basically building month after month, year over year, really, if you go out that far, is unforgiving. And it’s not so gracious. So I think for us today, what we want to talk about is, you know, along with some of the nuances of what grace is and kind of what are the differences between grace, deferment, and forbearance, is actually what you can do to mitigate some of that during that six-, nine-month time. So Christina, for you, when you think about grace versus deferment versus forbearance, can you tell the audience, basically break it down like what the difference is between those things? And how we should kind of go about the grace period?
Christina Slavonik: Sure. So yeah, just reiterating what you had just said, the grace period is the waiting period between your graduation and the actual start of loan repayment. So there’s also some other caveats. So if you’re going from full-time schooling to part-time schooling. And then if you withdraw from school, your grace period may also end. But the whole point of the grace period is just to give you some time to hopefully find that job and so that you have an income within that 6-9 months to start repaying back those loans. So yeah, looking at the difference, deferment allows you to completely stop making payments. So if you decide to return back to school, you can take advantage of that whereas forbearance, you stop the payment requirement altogether due to financial hardship. And there are different definitions of that and how that works.
Tim Baker: Yeah, and sometimes, if you’re going into a residency program, you can actually qualify for a deferment. And sometimes they categorize that as more schooling or forbearance because maybe the residency doesn’t pay you kind of anywhere close to what you would actually be able to pay off your loans with. So you know, it is important to understand the difference. But by and large, what we often say is that the grace period should be looked at with absolute caution. I feel like when we first started talking on this subject, Christina, and we would go and we would talk to residents or people that had just done residency or a fellowship or just even current residents and we would say, “Hey, how many of you deferred or put your, you know, loans into forbearance after the grace period?” And a lot of them opted into that just because just making ends meet with that residency salary was tough. The problem is — and we’ll talk about this a little bit more — is the fact of the matter is that you have this period of time to account for the period of time where life is adjusting. What we often see is that the lifestyle creep can kick in, we sometimes see that it’s just one of those things that are in the back of our mind that we know that this maybe six-figure monster is looming overhead, but we just don’t want to confront that quite yet. And typically, the longer that we kick the can down the road, the more painful it’s going to be. And it’s typically when we go from the grace period into repayment. So if you don’t do anything, that standard repayment plan is going to be your default plan. So again, the numbers per the averages is that if you have an average pharmacy loan debt of $160,000, the standard plan, which is over 10 years, it’s about an $1,800 per month payment. So if you don’t do anything, once you go from that grace period into the payment, whether it’s standard or one of the income-driven, all of the dollars that are in the interest column — you know, so you have your principal and your interest. And your interest has just been accumulating throughout school for those unsubsidized. And for the subsidized loans, they’re not. But once you basically have the act of going into repayment, all of those interest dollars migrate over to principal. So basically, it clears the ledger of interest, but then those dollars are now making interest and interest on top of interest, and that’s where it can get very predatory. So you know, one of the things that we’ll kind of talk about is what to do during the grace period and how to tackle that. But it’s super — you know, we talk about this time and time again, and you know, it’s kind of — we beat the drum on this is it’s all about intentionality. For some people, as they’re looking — and Christina, you and I can attest to this since working with so many residents —
Christina Slavonik: Definitely.
Tim Baker: And new grads, it’s like the job market is real. And sometimes, it doesn’t line up as quickly as you would want. So that’s where the grace period really can come into play. However, I think there are some ways that we can get into repayment easier and at a more preferential monthly payment that is actually doable, even on a resident’s salary. So in terms of some loopholes that we can talk about with regard to the grace period, what have you seen as kind of maybe the big loophole to kind of shift the default in terms of that six-month or that nine-month waiting period to get into repayment?
Christina Slavonik: The shift to think about — some people, the moment they get out, they’re like, oh, I want to pay down this debt, they want to consolidate. But just be careful to make sure you’re weighing all your options because even though you’re in grace period, once you do decide to consolidate or even refinance, that grace period will actually, you’ll lose it. So yeah, students who consolidate during the grace period will lose the remainder of that grace period. So that’s why, you know, we recommend that — say for instance, you’re about to enter repayment within 60 days or so. If you do decide to consolidate, just wait if you can to the end of that grace period so you’re kind of backing it up to that point so you don’t have to immediately be out of grace period and start having to pay it back that urgently.
Tim Baker: Yeah, so for some people, depending on what the strategy is — and we’ll kind of talk through some examples here — but for some people that they don’t want to lose the grace period because the income isn’t there to support that payment, something like a consolidation is ill advisable because you typically will lose that grace period. However, if you’re a pharmacist that you want to get into repayment as quickly as possible because you want to start the clock maybe on PSLF or you just want to get in the process of paying those loans down, consolidation is a great way to kind of cut through the grace period because for some people, they don’t need it. They have a job before they even graduate, and they basically can start the repayment process. So it just depends on where that’s at. Now, again, from a refinance perspective, anytime — so to just kind of recap of where we’re at with refinance, so consolidation is basically where we take one or more of our federal loans and we basically consolidate them down into one to two consolidation loans. And typically, the way this works is when you graduate, oftentimes, we’ll see pharmacists that have FELL loans, which are kind of like the old federal loans, they’ll have Stafford subsidized, Stafford unsubsidized, they might have a Perkins loan, they might have a private loan. So all the loans except for the private loan are eligible for the federal loan repayment, so that’s going to be your standard default and then one of the four income-driven ones, which is going to be IBR, ICR, revised Pay As You Earn and Pay As You Earn. However, especially for like the Perkins and the FELL loans, we often have to basically solve the square peg, round hole. So the FELL and the Perkins loans don’t fit into the income-driven ones. We basically have to consolidate those down to typically a consolidation subsidized and a consolidation unsubsidized to get into those income-driven plans. And what a lot of people do is they fail to do that. So in certain situations, we’ll have clients that are halfway through PSLF, it’ll be five years in, but they might have $30,000-40,000 of FELL loans that don’t qualify for forgiveness because they never consolidated those down. So my thought is you want to do this on the — basically from Jump Street. So if you just graduated and you’re unsure, timing your consolidation is important because if you do it like right now and you don’t have a job lined up, in 60 days, the payments are going to start, which might not necessarily be a bad thing. Or you wait until the end of the consolidation period. One thing to really focus on, Christina, is once you consolidate, any payments that you might have previously made — so that’s the example, the five-year, making payments for five years — that clock starts over. So that’s really important to really understand. So that’s a big roadblock is if you ask yourself, how many years have I been paying towards a forgiveness strategy before you consolidate? Because if you consolidate, then the time in that situation goes from five years to zero years, and that’s no bueno. So refinance, on the other example, is when you say, “Hey, thanks, federal system, it’s been great. But I’m going to take my income and my payment history and my credit, and I’m going to go out to say one of the YFP partners at Common Bond or SoFi or LendKey or Earnest and try to get a better rate since this is where I’m paying 6.5% with the federal government. I’m going to try to refi down and get a 5.5% rate at a term that fits me and my budget.” The big reminder there is once you go from private to federal, once we go from private to federal, we can’t go back. So that’s really important to remember as well. So that’s kind of a brief overview. So again, when we talk about the grace period loophole, what we’re really talking about is consolidation. And if we consolidate, then if you don’t want that six-month period, we can actually cut that by a third and get you into repayment basically in two months. So that’s kind of what we’re looking at. So Christina, when we talk about the grace period, what are the things that we do with clients, you know, maybe from a basic level when we talk about goals or budget — how would you start the conversation with regard to what do we do? What do we do during the grace period and really beyond that?
Christina Slavonik: Yeah, so basically, Tim, you just want to establish some ground rules. Obviously, what their job situation looks like and if they’re ready to just start looking at this. Because if they don’t do anything, at least they’ll have the standard plan that they’ll just default into. So we do get quite a few people that they’re finishing residency and about to start their job, and then they start kind of panicking. They’re like, well, what do we do with our student loans during this time? So I just try and reassure them, first and foremost, that hey, you don’t have to make a decision ASAP. But we have to get that conversation going. So firstly, you know, looking at their budget, seeing exactly where they’re at with their cash flow is the No. 1 thing and then formalizing a repayment plan from there. So you had already mentioned the RePAYE and the PAYE as well as the other IBR plans. Those are the typical ones that we see people falling into. And then if you can do it with PSLF, what that looks like. And then if you can’t qualify for PSLF or the Public Student Loan Forgiveness, what that also looks like. So of course, PSLF, you will pay the least amount as humanly possible, especially important to at least begin thinking about that from your P4 year to PGY1. And if you know you are going to be pursuing PSLF or have a job lined up with a nonprofit, consolidating to get into that repayment is so important because you want that clock to start ticking the moment you are starting to repay those loans.
Tim Baker: Yeah, so if we break that down. And we can kind of use a real-world example here. We had a client that actually is going from their PGY2 year into a nonprofit hospital position. So she was weighing a few different options, and she was looking at an option that paid her I think about $98,000 for the nonprofit hospital. And she had about $270,000 in debt, so to speak. And then she was also weighing a for-profit offer, which was about $125,000 in that area. And she actually decided to go with the nonprofit that paid her substantially less because as you said, you’re going to pay the least amount as humanly possible over the course of those 10 years. It’s not even a comparison. So for her, it’s really getting into the repayment as quickly as possible. Now, again, if you’re looking at like you mentioned, a P4 year going into a PGY1 or something like that, you want to start the clock on PSLF as soon as possible. So that’s typically where you want to get through the grace period, maybe you consolidate, start the payments in 60 days, and then really start the clock on that 120 payments hopefully over those 10 years. So those are all great points. So what if PSLF is not on the table? What if you say, “Hey, Tim, that’s great. I’m going to go work for a for-profit hospital or I’m going to go work in industry or something like that.” What’s a strategy that we would look at? And how would the grace period affect us in that mode in your estimation?
Christina Slavonik: There’s just really what you’re comfortable with. Non-PSLF, obviously, you can’t have RePAYE, but the thing is if there is any forgiveness, it’s going to non-PSLF forgiveness. So at the end of your payments, you will have to pay taxes back on whatever is forgiven. So knowing that in advance and being able to stock some extra money away at the end of that term is important because you don’t want to have a huge what we call a tax bomb on your tax return that final year when you do get everything paid off.
Tim Baker: Yeah, so if you’re transitioning from like a P4, like you said, Christina, into something that’s for-profit, typically something outside of PSLF forgiveness makes sense if you have a debt-to-income ratio higher than 2:1. So this is an example of, “Hey, Tim, I have $300,000 in debt. I’m offered $100,000 at my for-profit job. What do I do?” And this is typically where we would want to get you into one of the income-driven plans and get that started as quickly as possible. So again, in the grace period, it probably makes sense for you to do that. And then the idea is to one, lower your AGI just like you would in PSLF, get those payments down as low as possible. But in the non-PSLF strategy, what you really want to do is save for that tax bomb, as you mentioned, and make sure that there are dollars set aside for that so you’re not surprised by that.
Christina Slavonik: Yeah.
Tim Baker: And really, both of those cases, in the PSLF and the non-PSLF, if you can — again, given the budget and things that you mentioned, maybe having a little bit of cushion with the emergency fund — it’s really imperative in my estimation is to get into repayment as quickly so you can start the clock for forgiveness. The last one we should probably talk about is an aggressive option. So if you are of the mind of say like our Tim Church where he is in repayment, very aggressively — you know, in this scenario, the grace period might not even matter. Now, it could for some because if you’re a recent graduate and you’re waiting to get into repayment, sometimes when you refi, the refi companies want to see, they want to see proof of income, they want to see proof of payment, that you actually have a track record of doing so. So sometimes, doing nothing and just going through the grace period or at least consolidate them and maybe get into repayment more quickly might make sense. But from there, you know, you probably want to shop refi when you feel eligible, when you feel like you have a long enough track record and get that process going. You could also do nothing and stay in the standard plan after the grace period and just know that that interest will capitalize from the interest column into the principal column, which is not necessarily a fun thing. Any thoughts on that, Christina? In terms of what you see.
Christina Slavonik: Well, just be black or white. Don’t be anywhere in the middle.
Tim Baker: Yeah, exactly.
Christina Slavonik: You want to make a decision to do aggressive, do aggressive the whole way, just like Tim Church is a very good example, as well as many other clients and people we’ve had on the podcast. And those that listen on a regular basis have heard their stories. But yeah, just put all you have into it and head to the ground and get it done.
Tim Baker: But it’s one of those things, though, you know, it’s kind of our human nature where if I’m putting the least amount towards my loans, sometimes I may feel guilty, so maybe I get a tax refund or maybe I get a graduation gift, and I want to like put that towards my loans and get the process started. But if you’re seeking a forgiveness play, it’s like, uh uh. You want to fly that flag until you are forgiven. But human nature, we kind of revert to the mean. So that’s not necessarily the right thing to do. So important to, again, understand your strategy and stick to the strategy.
Christina Slavonik: Exactly.
Tim Baker: Yeah, at the end of the day, what we often like to say, this is more about intentionality. And I think what sometimes happens with the grace period is that we lose some of the intentionality because we get comfortable in kind of that transitionary space or we just kind of forget — we have clients that will say, “Oh yeah, the loans. Like now I have a bill for $1,800. What do I do?” We’re seeing more and more people become proactive and I think intentional, which I think it’s a great sign that maybe we’re moving the needle a bit. And people can speak through the different strategies and that type of thing. But the grace period I think, like you said, it’s not necessarily gracious from a math perspective but then also from a behavioral perspective just because of that half a year, so to speak, where you get comfortable without having to really worry about the loans. Me, that can be almost as problematic as the math. So I think to kind of reiterate, the grace period, it’s not necessarily gracious. It’s going to be different than the forbearance and the deferment options that are going to be out there for many, especially if you’re having problems finding a job in those maybe pharmacy-saturated markets or if you’re going into residency, you can easily opt into those types of things. But what our suggestion over this grace period is one, does it make sense to cut through that? And if it doesn’t, I think just having a plan going forward with the loans because it’s not hyperbole to say that the decision of what you do with the loans, especially out of the gate, can be hundreds of thousands of dollars one way or the other, especially with the average loan forgiveness programs we’re seeing.
Christina Slavonik: Yeah. Like a huge difference.
Tim Baker: Yeah. You know, and you’ve seen it, Christina, when we’re working with clients, it’s like when we put that on the decision table, for a lot of people, it’s really the first time that they’ve actually looked at the numbers and actually seen like, OK, if I go down this path, this is what I’m going to pay in total and this is kind of my monthly payment that I can expect. And that can be shocking for a lot of people, especially if they’ve been in this mindset going through pharmacy school of just kind of sticking your head down and worrying about getting through pharmacy school because that’s really hard in and of itself.The financial side has kind of been buried. And it’s funny, when we go to the APhA conference and I talk to students there, and I say, “Hey, what are you — what’s your thoughts about your student loans?” It’s like, “I don’t even think about my student loans.” It’s almost like they stick their head in the sand, and they don’t worry about them, which I think can be problematic in and of itself. But the grace period can be almost an extension of that because we’re kicking the can another half year down the road for us to actually come to grips with what we actually have to pay back and how do we use the tools out there?
Christina Slavonik: Exactly.
Tim Baker: So once again, Christina, thank you for coming on the YFP podcast to lend your voice to this discussion about the grace period and student loans, always great to have you represented here. And I think we covered a lot of ground. You know, I think we talked about the difference between the grace period, forbearance, and deferment. We talked about different strategies and the grace period loophole with regard to consolidation. And what we really want as a community is for you, the recent pharmacy graduate, to really be intentional with your student loans. Now, if you’re looking for additional resources, additional podcasts to listen to with regard to the student loans and as you’re transitioning, I want to point you to three different episodes: Episode 051, which is 8 Things to Do or Avoid to Evade Financial Purgatory After Graduation, and then 052, the one following it, is 5 Steps to Crush Your Student Loans. Great resources. And then finally, Episode 099 is Key Financial Moves for Pharmacy Graduates. I think this podcast, along with those other three, will really equip you on your journey to pay back your student debt. So thank you for listening to this week’s episode of the Your Financial Pharmacist podcast. And looking forward to next time.
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