Talking about the ins-and-outs of student loans can be complicated. Plus, anything you don’t fully comprehend is often daunting and downright confusing.
However, you can easily overcome this simply by learning about the terms and numbers attached to your student loans.
Before signing on the dotted line, here are 10 of the most common financial terms every college graduate with student loans should know.
1. Principal balance
Your student loan balance is divided up into two things: the principal balance, and the principal balance plus interest owed.
Your initial loan amount is considered the principal balance as this is the original amount of money you borrowed. However, your monthly payment takes into account the principal plus any accrued interest that’s due.
As you pay your student loan debt, a portion of the money goes towards paying down the principal. Simultaneously, another portion goes towards accrued interest.
Another important student loan term is interest. The amount of interest you pay on your student loan is different from the student loan interest rates attached to that loan.
Interest is the cost associated with borrowing money. It’s what you’ll pay over the lifetime of the student loan. It’s calculated based on a percentage of your remaining unpaid balance due.
3. Student loan interest rates
Student loan interest rates, on the other hand, is that exact percentage figure that’s charged to your student loan account.
It’s often called an Annual Percent Rate, or APR. It’s a number agreed upon by you and the lender when you first take out your student loan.
You can often refinance your student loan in an effort to lower your student loan interest rates. This, in turn, will help lower the amount of interest you pay throughout the lifespan of the loan.
4. Grace period
The grace period that’s associated with your student loans starts from the day you graduate or leave school for any other reason. It typically lasts about six to nine months.
The reason it’s called a “grace period” is that you’re not required to make any payments during this time. This can help you focus on getting a job and preparing for regular monthly student loan payments.
Once the grace period ends for your student loans, you must start paying back your loan with monthly installments.
5. Repayment term
This is a plan agreed upon between you and the lender. It determines how much you’ll pay each month towards your student loan balance and for how long.
For student loan repayment terms there are multiple types of repayment plans. A larger payment plan aids in paying down your loan faster. Conversely, a smaller monthly payment requires a longer payback term.
You can change student loan repayment plans if you’re eligible, which is something to be considered if it will help you manage your overall finances as well.
6. Discretionary income
Discretionary income refers to any income that remains after subtracting taxes, paying essential bills, and other required expenses related to the size of your family.
As you apply for different repayment options, your discretionary income will come into play by either confirming or denying your eligibility for certain plans.
7. Loan origination fee
When you first apply for your student loans or are in the process of refinancing, your lender may charge you a loan origination fee.
This is an up-front fee that covers any loan costs like time, labor, and filing fees associated with processing your student loans.
A loan origination fee is usually based on a percentage of your total loan amount and is often rolled into the principal balance of your entire loan.
8. Annual taxable income
Your annual taxable income also called annual gross income (or AGI), includes all the money you’ve received throughout the year from all income sources.
Income sources include employment income, interest income, freelance work. Other sources like investments, unemployment or Social Security is also calculated into your AGI.
If the source of income you’re receiving is considered taxable, it must be calculated into your annual taxable income. It does not include income from child support or government assistance.
9. Gross income
Gross income differs from annual taxable income in that it’s your total income before any deductions.
It includes all income from all sources, even non-taxable ones, before paying taxes, contributing to retirement accounts, and paying any other bills.
Unlike your AGI, gross income does include income from sources like child support, and federal or state assistance programs.
10. Student loans interest deduction
Every year you pay down your student loan balance is a year you may be eligible for the student loan interest tax deduction.
You can deduct up to $2,500 worth of interest paid towards your student loan, on the front portion of your tax return.
There are income limitations, but it could help reduce your total AGI and thus reduce the amount of income that you have to pay taxes on.
Understanding student loan terms
Taking on the debt burden of a student loan is serious business. Before signing on the dotted line, make sure you’re at least a little familiar with how your particular loan functions.
Not only are there a plethora of student loan terms to learn, but there are ever-changing factors like repayment plans and other figures that can affect your monthly payment.
Thankfully, you can avoid confusion and additional stress by knowing these basic student loan terms and understanding how they function.
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