Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 5, 2012

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As the weeks leading up to July 1, 2012 fast approached, students and parents across the nation watched the news with nail-biting anxiety. They were worried that a key piece of legislation—a law that was holding federal student loans at an artificially low interest rate of 3.8 percent—would expire come the end of June. Democrats and Republicans both pitched unrealistic proposals that both knew the other would never agree to, and the situation truly looked dire.

Then at the 11th hour, just two days before the July 1 deadline, our politicians united and signed an extension of the student loan bill.

Everybody, including the White House, rejoiced. But amidst our cheers and laughter something slipped by unnoticed. While this “something” may not be as dangerous as a doubling of student loan interest rates, it’s still extremely detrimental to our college-educated population. This “something” was hidden from view, blocked by the overbearing shadow that the potential 6.8 percent interest rate cast, and it’s exactly where the July 1 student loan changes failed.

The History of the Student Loan Grace Period

When past students received federal college loans, they didn’t have to begin repayment until after they obtained their degree.

The theory behind this was that it enabled our country to quickly produce a highly educated work force. If students opted to obtain a degree with federal money, then the government felt they should enter the work force as quickly as possible. But if students were required to make payments on their college loans while in school, then they would be required to hold a job and divert some of their time and attention from their studies. The result of which would be prolonging one’s pursuit of a final career.

Since the government felt it better to begin pumping out an educated work force, they installed the six-month grace period. Students with federal college loans didn’t need to repay their college-related financing until six months after graduating with a degree.

This allowed students to fully devote their time and efforts to their education, and—this is important—it gave our students a chance to find a job once their college career ended.

The Student Loan Grace Period is History

But with the passing of July 1, federal student loans lost this grace period. Politicians were so preoccupied with pushing the artificial college loan interest rate ceiling through Congress that they failed to include any mention of the grace period extension that was also set to expire on July 1.

Now students who graduate from college will immediately be bombarded with bills from Uncle Sam. Several hundred dollars will be owed to the government within four weeks of obtaining a degree, so our soon-to-be educated youth will need to have a job (or, to all the parents out there, some other source of money) before graduating if they wish to keep their credit scores intact.

This employment necessity is much easier to say than do, particularly given our dismal job market and recent poor employment reports. With the unemployment rate ticking up to 8.2 percent in May of this year, we can expect nearly one in 10 graduates to be without work.

And that speaks nothing of the underemployment problem our nation is facing. Underemployment, in which skilled or educated individuals are making far less money than they deserve—performing work that’s not utilizing their talents—is far more rampant and difficult to monitor than unemployment.

While interest rates on government-backed college loans will remain low for at least one more year, future students will now need to devise a plan as to how they will begin repaying their financing immediately upon graduating.

Current Students are Fine… Future Students Need to Worry

For what it’s worth, however, most current students don’t need to worry about this change. Those who obtained college financing on or before June 30, 2012 still have the six-month grace period included in their contracts.

It’s those who take out college loans on July 1, 2012 or later that will no longer receive the six-month grace period protection.

We thought July 1 was one big bullet that we needed to dodge, but unfortunately July 1 came in the form of scattershot. While we dodge the brunt of the attack, we still got hit by some of the smaller pieces.