21 Student Loan Definitions Everyone Should Know

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.

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Published in Student Loan Dictionary, Student Loans

  • Love the Monopoly money comment. It’s far too common for students to take out excess money to use as “fun money”. Terrible idea, don’t do it!