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:
- Debt-to-income ratio
- Expected Family Contribution (EFC)
- Grace period
- Interest rate
- Loan forgiveness
- Loan servicer
- Master Promissory Note (MPN)
- Principal loan
- Repayment term
- Subsidized loans
- Unsubsidized loans
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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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1 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
ANNUAL PERCENTAGE RATE (“APR”)
There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.
For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
ELIGIBILITY & ELIGIBLE LOANS
Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).
Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.
All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.
For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.
The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.
The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.
POSTPONING OR REDUCING PAYMENTS
After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship.
We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.
We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.
If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of June 23, 2020 and is subject to change.
2 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Splash Financial loans are available through arrangements with lending partners. Your loan application will be submitted to the lending partner and be evaluated at their sole discretion. For loans where a credit union is the lender, or a purchaser of the loan, in order to refinance your loans, you will need to become a credit union member.
The Splash Student Loan Refinance Program is not offered or endorsed by any college or university. Neither Splash Financial nor the lending partner are affiliated with or endorse any college or university listed on this website.
You should review the benefits of your federal student loan; it may offer specific benefits that a private refinance/consolidation loan may not offer. If you work in the public sector, are in the military or taking advantage of a federal department of relief program, such as income based repayment or public service forgiveness, you may not want to refinance, as these benefits do not transfer to private refinance/consolidation loans.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 1, 2020.
Fixed APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rate options range from 2.88% (without autopay) to 7.27% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Rates are subject to change without notice. Fixed rate options without an autopay discount consist of a range from 2.88% per year to 6.21% per year for a 5-year term, 3.40% per year to 6.25% per year for a 7-year term, 3.45% to 5.08% for a 8-year term, 3.89% per year to 6.65% per year for a 10-year term, 4.18% per year to 5.11% per year for a 12-year term, 4.20% per year to 7.05% per year for a 15-year term, or 4.51% per year to 7.27% per year for a 20-year term, with no origination fees. The fixed interest rate will apply until the loan is paid in full (whether before or after default, and whether before or after the scheduled maturity date of the loan).
Variable APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Variable rate options range from 1.99% (with autopay) to 7.10% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Our lowest rate option is shown with a 0.25% autopay discount. Our highest rate option does not include an autopay discount. The variable rates are based on the Variable rate index, is 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 April 27, 2020, the one-month LIBOR rate is 0.43763%. The interest rate on a variable rate loan is comprised of an index and margin added together. The margin is a fixed amount (disclosed at the time of your loan application) added each month to the index to determine the next month’s variable rate. Variable rate options without an autopay discount consist of a range from 2.01% per year to 6.30% per year for a 5-year term, 4.00% per year to 6.35% per year for a 7-year term, 2.09% per year to 3.92% per year for a 8-year term, 4.25% per year to 6.40% per year for a 10-year term, 2.67% per year to 4.56% per year for a 12-year term, 3.44% per year to 6.65% per year for a 15-year term, 4.75% per year to 6.93% per year for a 20-year term, or 5.14% per year to 7.10% for a 25-year term, with no origination fees. APR is subject to increase after consummation. Variable interest rates 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 co-signer. The maximum variable rate may be between 9.00% and 16.00%, depending on loan term. The floor rate may be between 0.54% and 4.21%, depending on loan term. These rates are 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.
3 Important Disclosures for SoFi.
4 Important Disclosures for Earnest.
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 3.19% APR (with Auto Pay) to 6.43% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.43% 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 June 15, 2020, 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 6/15/2020. 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 [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 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.
5 Important Disclosures for CommonBond.
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 0.2% effective May 10, 2020.