21 Student Loan Definitions Everyone Should Know

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When I was 17, I signed on the dotted line and took out student loans to attend college. I didn’t have a clue what I was signing up for. All I knew was that if I wanted to attend a college that fall, student loans would help me do that.

As a young adult, it can be overwhelming to read a legally-binding contract full of unfamiliar terms. And when you sign up for something you aren’t 100 percent clear on, that’s usually when you run into trouble.

It’s no different when you’re learning to speak the language of stocks or mastering mortgage verbiage before buying a house. So before financing your education, consider these 21 important student loan definitions.

21 student loan definitions you need to know

A whopping 25 percent student loan borrowers don’t know whether they have federal and private loans, according to a 2017 survey from Prudential Financial. But even if you know what a federal student loan is, that’s just one student loan definition among many. Here are 21 more:

Capitalization

I was shocked when I graduated and found that my loan amount grew because of capitalization. I didn’t understand how student loan interest actually works.

Capitalization of interest is when the interest that accumulates on your student loans is added to the principal balance. Interest can add up quickly and can add to the sum of your principal, making it tough to pay back student loans.

Consolidation

To consolidate is to group. In the case of federal student loans, a borrower might consider grouping numerous loans with numerous servicers into a Direct Consolidation Loan. Consolidating would simplify your repayment, giving you one new, larger loan with one servicer.

Consolidating won’t save you money the way that refinancing would. The interest rate of your Direct Consolidation Loan would be a weighted average of your previous loans’ rates, plus a small percentage on top.

There are more factors to weigh when deciding if Direct Loan Consolidation is right for you.

Co-signer

Many private student loans require a co-signer. A co-signer is typically a parent or relative with good credit that signs the promissory note and is responsible for the student loan if the primary borrower is unable to make payments.

You might need a co-signer if you have a limited (or poor) credit history and are applying for a private student loan. But consider the pros and cons of student loans without a co-signer before making a final decision.

Most federal loans don’t require a co-signer, but you might need a creditworthy endorser for a Direct PLUS Loan.

Debt-to-income ratio

Private lenders look at the ratio between your outstanding debt and your annual income when evaluating you as a loan applicant and deciding what rates to offer you. It’s important to know your debt-to-income ratio (DTI) when shopping for a loan.

You’re better off with a lower DTI, which would put you in a better position to pay off your loans.

Debt-to-Income (DTI) Calculator

Default

If you fail to make a monthly payment for 270 consecutive days (or nine straight months), your federal student loan will enter default. Your lender, the Department of Education (DOE) in this case, will report the default, causing harm to your credit report.

That’s just scratching the surface of everything you need to know about default.

There’s even less room for error on many private student loans, for example. Your lenders could skip past delinquency and push you into default after missing a single monthly payment.

Deferment

You can pause repayment on your federal student loans for as long as three years by applying for one of numerous forms of deferment. You might be able to secure deferment if you become unemployed, for example, but it might not be the right option for you.

Deferment is doubly helpful for Direct Subsidized Loans, as it stops interest from accruing. The same isn’t true for Direct Unsubsidized Loans.

Private lenders might or might not offer some relief. You should compare the protections offered by private lenders before taking out a loan in the first place.

Delinquency

Although delinquency can lead to default, a more serious predicament, you are delinquent on your student loan as soon as you miss a single payment.

Delinquencies are reported to credit agencies. They don’t cause as much damage to your credit report as a default as long as you get back on track with repayment.

Expected Family Contribution (EFC)

The student aid report you receive from schools will estimate how much you and your family can reasonably contribute to the cost of your education. This estimation is computed based on the family income information you entered on your FAFSA.

A low Expected Family Contribution means you might be eligible for more financial aid, such as grants, a work-study program, or subsidized loans. A higher EFC, on the other hand, means you might be on the hook for a larger percentage of your cost of attendance.

Forbearance

If you don’t qualify for a deferment, forbearance also allows you to pause your student loan payments for as much as 12 months at a time. It might be offered at the discretion of your federal loan servicer. It also won’t stop interest from accruing on your loans, even subsidized loans.

Private lenders might offer forbearance in some form or fashion.

It’s important to ask your lender or servicer about the protections it offers before deciding on the best way to pause your student loan payments.

Grace period

A grace period is a set amount of time, typically six months, before your repayment begins. You enter your grace period upon graduation, after leaving school, or dropping below half-time enrollment.

Not all student loans have a grace period, and interest might still accrue on your loans.

But you’ll want to make the most of a grace period if you have one. It might be wise to make loan payments during this period because interest accrues on your loan while you wait to repay it.

Interest rate

When you borrow money from the federal government or a private lender, they want to make sure they are receiving a return on their investment. As part of the lending process, they will add interest to your loans.

If you are taking out federal student loans, the interest rate is set by Congress. Current interest rates for federal loans are fixed, meaning they will remain the same throughout the life of your loan. Private lenders might offer fixed or variable interest rates.

The interest rate you might be quoted is based a variety of factors.

Lender

If you borrow money, you have a lender that gave you the money. For student loans, the lender could be the DOE, as is the case for many federal student loans. It can also be a bank, a credit union, or another private company. It’s also worth noting that your private student loan could be sold to another lender.

You might take out a $5,000 loan with CommonBond as your lender, for example. Similarly, SoFi could be your lender on a separate private loan.

No matter your lender, it’s wise to ask if a different company will act as the servicer of your loan. The servicer, which might not be your lender, is your go-to source for troubleshooting your loan.

LIBOR

Although Congress sets the interest rates for federal loans, private lenders take their cue from the Federal Reserve and the London Interbank Offered Rate (LIBOR).

LIBOR is an average interest rate itself. Its fluctuations are particularly impactful if you’re shopping around for a private loan or selected a variable interest rate loan and are now at the mercy of the market.

Loan forgiveness

Your federal student loan could be partially or fully forgiven if you qualify for one of the DOE’s loan forgiveness programs. Typically, you can receive this form of relief if you make consistent payments over a specific period, work in a public-service field, and submit supporting documentation with your application.

Some loan forgiveness programs could delete your student loan debt immediately. Others, like the Federal Perkins Loan program, might offer you complete forgiveness over a five-year period, 15, 20, or 30 percent of your loan balance at a time. That specific type of forgiveness is only available to borrowers who took out a Perkins Loan before the program expired on Sept. 30.

Loan servicer

When it’s time to make payments, you send your money to your loan servicer. They handle all the payments for your student loans. If you have any questions about your repayment plan or are struggling to make payments, you want to talk to your loan servicer.

If you have a federal loan, for example, the DOE acts as your lender, but your servicer might be Navient (or one of eight other federal loan servicers). Because loans can be transferred, it’s important to know how to track down your loan servicer in a pinch.

Master Promissory Note (MPN)

If you take out federal student loans, you must sign a Master Promissory Note (MPN). This is a legal document that holds you accountable for paying back loans, fees, and interest owed to the DOE.

An MPN lets borrowers take out multiple student loans for a period of up to 10 years, so long as your school allows it. Your MPN will outline all the terms and conditions of your student loans, so be sure to read carefully before signing.

Principal loan

The principal is the amount you originally borrowed when taking out student loans — before any interest or fees were added on. It’s important to know this term because your payments must first go toward any outstanding fees and interest before going toward principal. This is one of the reasons to make extra payments on your student loans.

When interest capitalizes, it’s added to your principal. Depending upon your loan type, you might graduate with a larger loan principal than the one you started with as a freshman.

Refinance

Refinancing your student loans allows you to take multiple loans (and their various servicers) to the private lender of your choice and potentially score a better interest rate and loan term on a new, larger loan.

As you consider refinancing your student loans, be aware that working with a private lender isn’t a wise move if you want to keep your federal loan protections or are working toward loan forgiveness.

Student Loan Refinancing Calculator

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Repayment term

Your repayment term, also known as your repayment period, is how long you have to pay back your student loans.

Federal student loan borrowers are enrolled in the Standard Repayment Plan, which has a repayment term of 10 years. You might be able to extend your repayment term through a different repayment plan, though you’ll end up paying more in interest over time.

This is why it’s especially important to pick the best repayment terms when refinancing.

Subsidized loans

Direct Subsidized Loans are offered to students who demonstrate financial need. They’re great because the DOE pays your interest while you are in school and during your grace period or deferment.

Unsubsidized loans

Direct Unsubsidized Loans are available to anyone regardless of financial need. The bad news is you are responsible for every cent of interest that accrues, even while in school or during deferment. There are also other differences between unsubsidized and subsidized loans.

Knowledge is power when it comes to student loan definitions

Taking out student loans to attend college is serious business. You might have no other choice, but it’s important to become familiar with these essential student loan definition terms before saying yes to educational debt.

Knowing these loan definition terms now can help you avoid lots of confusion or stress later on when it’s time to pay up.

Melanie Lockert contributed to the reporting for this article.

Interested in refinancing student loans?

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LenderVariable APREligible Degrees 
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1 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at hello@earnest.com, or call 888-601-2801 for more information on ourstudent loan refinance product.

© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.

Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.

However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance:
    Fixed rates from 3.899% APR to 7.979% APR (with AutoPay). Variable rates from 2.470% APR to 6.990% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.470% APR assumes current 1 month LIBOR rate of 2.30% plus 0.91% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score.
  2. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

4 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.

All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.


6 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of November 1, 2018, the one-month LIBOR rate is 2.29%. Variable interest rates range from 2.79%-8.39% (2.79%-8.39% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.75%-8.69% (3.75%-8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled. Applicants with an Associate’s degree or with no degree must have made at least 12 qualifying payments after leaving school. Qualifying payments are the most recent on time and consecutive payments of principal and interest on the loans being refinanced. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a cosigner who is a U.S. citizen or permanent resident. The cosigner (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a cosigner will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.

2.47% – 6.99%3Undergrad
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2.57% – 6.97%1Undergrad
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2.51% – 8.09%4Undergrad
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3.02% – 6.44%2Undergrad
& Graduate

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2.50% – 7.24%5Undergrad
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2.79% – 8.39%6Undergrad
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