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It’s Time to Extend the Student Loan Grace Period for Recent Graduates

Posted on May 16th, 2015  Posted by Raymar Hampshire
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A celestial event occurs every year around May - when millions of mortarboards return to the earth from their exhilarating ascent to the heavens.  The Higher Education gods respond by granting the owner of these mortarboards with a loan repayment grace period.  This grace period is exactly six months.

Unfortunately, this is not exactly how it happens.  Recent graduates are actually granted with a six-month grace period from the very earth-bound Department of Education.  Moreover, the grace period only applies to students with federal subsidized and unsubsidized loans.  What is not covered?  Most private loans, as well as Federal Plus Loans.  The problem is that these are the loans made available for students in graduate school.  So, if you decided to advance your prospects in the job market by pursuing a master's degree, Congress has decided that you don't deserve a grace period, with the repayment period kicking in well before you have even found the coffee machine at your new job – assuming you have been able to land one.

But, back to the six-month grace period.  Why six months?  Embarking on writing this article, I really did not have the slightest idea.  Curious to find out the rationale for this scope of time, I paid a visit to ED.gov.  Perhaps, I reasoned, it must be buried somewhere on the Department of Education’s website.  To be fair, ED has a ton of useful information on financial assistance for students, including details and caveats for the grace period, but nothing detailing the rationale for six months.  Given the amount of time it has taken the average graduate to find work, this period simply seems arbitrary and outdated at best.

The grace period was designed to protect recent graduates against the inability to begin loan repayment.  There’s an entire industry based on this principle.  It’s called insurance and we have it for just about anything that could go wrong.  A similar insurance to the grace period for recent graduates is the unemployment insurance for workers who have been laid off.  One provides financial protection for graduates entering the labor market and the other provides financial protection for employees leaving the workforce.

I’m no actuary, but one thing I know about insurance is that it is a tricky balancing act between risk and reward, which constantly needs rebalancing to reflect the current reality e.g., people living longer, less people driving, etc.  For unemployment insurance, the current reality is that 3.6 million people have been searching for work for six months or longer and cannot find a job.  With exception to earlier this month, when the economy weakens, Congress has usually extended unemployment insurance past six months.  We will have to wait and see what happens next.  However, while we wait many of these people searching for work are recent graduates, who likely do not have the same level of networks that are helpful in landing a job that other seasoned graduates in the job market have.  The reality is that this has been the most challenging job market for recent graduates.  According to a study by the Federal Reserve in January, “Are Recent College Graduates Finding Good Jobs”, both unemployment and underemployment have followed a clear upward trend for recent college graduates over the past two decades, and particularly since the 2001 recession. While debate continues to rage on for extending unemployment insurance, Congress should also be talking about extending the student loan grace period from six months to nine months to a year – at least.  The grace period needs rebalancing.

Politics aside, the successful passage for most government benefit programs usually comes down to how it’s paid for.  Do we take money from another program, raise revenue through taxes, add it to the federal debt, or some combination?  Interestingly, extending the grace period for student loans could actually increase government revenue thanks to a provision put in place by Congress July 1, 2012, which eliminates the interest subsidy for undergraduates with Direct Subsidized loans while they are enrolled in school and during the grace period.  This provision also eliminated subsidized loans for those fancy students pursuing their masters.

What's left are unsubsidized loans that start accruing interest for both undergrad and graduate students around the same time they finish their college orientation skits and painfully forced team-building activities.  This all likely means that the government stands to continue to make money from the capitalization of accrued interest if they extend the grace period.  How is that for grace?

In addition to the fiscal merits of extending the grace period, it’s equally important to note that the consumers of student loans also stand to benefit.  According to the Department of Education, “the grace period gives you [students] time to get financially settled and to select your repayment plan.”  It also lays out what you should be doing to prepare for repayment during your grace period (And no, backpacking across Europe is not on the list).  More time is generally a good thing--unless you procrastinate, which can be costly as compound interest is working against you. Graduates beware.

Unfortunately, a bill that was introduced to Congress in March 28, 2012, that proposed extending the grace period for Direct Stafford Loans and Federal Direct Unsubsidized Stafford Loans died in committee. Maybe, now is the right time? It would seem that a fiscally responsible benefit that helps this generation’s graduates by extending the grace period would be a bipartisan slam-dunk.  Perhaps this is not grace at all and it hasn't ever been grace.  Maybe the Higher Education gods who grant free and unmerited favor to lowly graduates in exchange for their mortarboards was just something I made up. This could be a good thing.  After all, too much grace could just be another example of Obama's so called "socialist agenda". Maybe, we should all rightfully refer to this "grace period", and any extension to it, for what it really is, a "win-win period" that benefits both graduates and the government.

Raymar Hampshire is an advocate for access and affordability of higher education, Founder & CEO of SponsorChange, and a recipient of the 2014 SXSW Dewey Winburne Community Service Award.

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