Student Loan Definitions: What You Need to Know Before Borrowing

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A student loan is borrowed money from a lender to pay for tuition, fees, living expenses and other costs associated with seeking higher education. Because it’s a loan, you or your parent must repay the borrowed amount plus interest, although repayment is typically deferred until the student has left school and for six months afterward.

Student loans are most commonly borrowed from the federal government because it’s historically awarded lower interest rates and greater repayment protections — without requiring borrowers to have strong consumer credit. Debt could also be lent by state government authorities, banks, credit unions and online companies, which do take credit history into account when quoting rates and terms.

Defining a student loan, it turns out, is pretty simple. Unfortunately, other student loan definitions are far more complex.

Student loan definitions you need to know

Only 12% of college students with education debt reported being “very confident” in their knowledge of loans and how they work, according to our 2019 survey on student loan misconceptions.

Knowing the basic student loan definition is just the first piece of the puzzle. Here are 21 more:

1. Capitalization
2. Consolidation
3. Cosigner
4. Debt-to-income ratio
5. Default
6. Deferment
7. Delinquency
8. Expected Family Contribution (EFC)
9. Forbearance
10. Grace period
11. Interest rate
12. Lender
14. Loan forgiveness
15. Loan servicer
16. Master Promissory Note (MPN)
17. Principal loan
18. Refinance
19. Repayment term
20. Subsidized loans
21. Unsubsidized loans
Plus: Knowledge is power when it comes to student loan definitions


Loan amounts grow because of capitalization — that’s how student loan interest 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 whether direct loan consolidation is right for you.


Many private student loans require a cosigner. A cosigner 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 cosigner 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 cosigner before making a final decision.

Most federal loans don’t require a cosigner, 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


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 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 student loan 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.


Per the student loan definition on the federal front, you can pause repayment 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 take time before deciding whether loan deferment is right 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 economic hardship protections offered by private lenders before taking out a loan in the first place.


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.


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.

The student loan definition isn’t black and white: Not all 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 may 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.

A variety of factors determines student loan interest rates.


If you borrow money, you have a lender that gave you the money. For student loans, the lender could be the Department of Education, 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.


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 education department’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 cancellation program, might offer you complete forgiveness 15%, 20% or 30% of your loan balance at a time, over a five-year period.

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 Department of Education acts as your lender, but your servicer might be Navient (or one of the 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 Department of Education.

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 student loan definition 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.


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 or monthly payment.

Student Loan Refinancing Calculator






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.

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.

Subsidized loans

Direct subsidized loans are offered to students who demonstrate financial need. They’re great because the education department 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. You could lessen or erase the toll, however, by making in-school loan payments.

There are also other differences between unsubsidized and subsidized loans.

Knowledge is power when it comes to student loan definitions

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% clear on, that’s when you run into trouble.

It’s no different when you’re learning to speak the language of stocks or mastering common mortgage terms before buying a house.

So before financing your education, consider these 21 important student loan definitions. Understanding student loans now can help you avoid lots of confusion or stress when it’s time to pay up.

Melanie Lockert contributed to this report.

Interested in refinancing student loans?

Here are the top 9 lenders of 2021!
LenderVariable APREligible Degrees 
1.88% – 6.15%1Undergrad
& Graduate

Visit Splash

1.88% – 5.64%2Undergrad
& Graduate

Visit Earnest

1.88% – 5.64%3Undergrad
& Graduate

Visit NaviRefi

2.50% – 6.85%4Undergrad
& Graduate

Visit CommonBond

2.25% – 6.39%5Undergrad
& Graduate

Visit SoFi

1.90% – 5.25%6Undergrad
& Graduate

Visit Lendkey

1.89% – 5.90%7Undergrad
& Graduate

Visit Laurel Road

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

2.13% – 5.25%8Undergrad
& Graduate

Visit PenFed

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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 June 1, 2021.

2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.

Earnest Disclosures

Interest Rate Disclosure

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.59% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance 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 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions.

Auto Pay Discount Disclosure

You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.

Student Loan Refinancing Loan Cost Examples

These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License.

One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America.

© 2021 Earnest LLC. All rights reserved.

3 Important Disclosures for Navient.

Navient Disclosures

1. NaviRefi loans are made by Earnest Operations LLC, a member of the Navient family of companies, subject to individual approval and underwriting criteria. California residents only: Loans made or arranged pursuant to a California Finance Lenders Law license. Additional terms and conditions apply.

– To qualify, you must be a U.S. citizen or non-citizen permanent resident of the United States, reside in a state we lend in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Loan terms are subject to eligibility. Approval and interest rate depend on the review of a complete application. Loan approval is subject to confirmation that your debt-to-income, free cash flow, credit history and application information meet the minimum requirements. You must have a minimum FICO score to be considered.

– You can choose between fixed and variable rates. Fixed interest rates are 2.75% – 6.04% APR (2.50% – 5.79% APR with Auto Pay discount). Starting variable interest rates are 2.13% – 5.89% APR (1.88% – 5.64% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA.

– You can take advantage of the 0.25% Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. NaviRefi rate ranges are current as of June 1, 2021 and are subject to change based on market conditions and borrower eligibility.

– The information provided on this page is updated as of 06/1/2021. Earnest Operations LLC reserves the right to modify or discontinue (in whole or in part) this loan program and its associated services and benefits at any time without notice. Check for the most up-to-date information. Terms and Conditions apply. Call 855-284-4893 for more information on our student loan refinance product.

– Earnest Operations LLC – NMLS #1204917, CA CFL #6054788 – 535 Mission St., Suite 1663, San Francisco, CA 94105.
Navient Solutions, LLC – NMLS #212430 – 123 Justison St., Wilmington, DE 19801. Visit for a full list of licensed states.

4 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. 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 0.15% effective Jan 1, 2021 and may increase after consummation.

5 Important Disclosures for SoFi.

SoFi Disclosures

Fixed rates from 2.74% APR to 6.74% APR (with autopay). Variable rates from 2.25% APR to 6.39% APR (with autopay). All variable rates are based on the 1-month LIBOR and may increase after consummation if LIBOR increases; see more at If approved for a loan your rate will depend on a variety of factors such as your credit profile, your application and your selected loan terms. Your rate will be within the ranges of rates listed above. Lowest rates reserved for the most creditworthy borrowers. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license #6054612; NMLS #1121636 ( Additional terms and conditions apply; see for details. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

6 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via 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 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 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.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.

7 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. 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. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. 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. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.


This information is current as of April 29, 2021. Information and rates are subject to change without notice.

8 Important Disclosures for PenFed.

PenFed Disclosures

Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. 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.