Understanding student loans: definitions you need to know
Are you feeling like you don’t understand student loans? Are you confused about student loan fine print? Do you need help understanding student loan terms?
As the cost of college continues to rise, many students turn to loans as a way to finance their education.
Navigating student loans can be a daunting task. Student loans are complicated and confusing.
They are also expensive and legally binding, so you need to understand what you are agreeing to when you sign up for a student loan.
Understanding the jargon and terms associated with student loans is essential to making informed decisions. To avoid financial mistakes, you must understand student loan definitions and terms.
This post includes the definitions of student loan terms you need to understand before you take on student loan debt. My goal in writing this post is to help students and families make educated choses about financing college with student loans.
These student loan definitions will help you with understanding student loans and making informed decisions about taking student loans for college—and potentially save you a lot of money!
Student Loan Terms and Definitions
ACCRUED INTEREST
Accrued interest is the interest that accumulates on the unpaid balance of a loan. Student loan interest will continue to accrue until the full balance of the student loan is paid.
Loans with higher interest rates will have more accrued interest over time.
ANNUAL PERCENTAGE RATE (APR)
The APR is the interest associated with a loan. This may be fixed (unchanging) or variable (subject to change). The APR takes into account the principal loan amount, interest rate, fees, and other costs of the loan, as well as the length of repayment.
BORROWER
The borrower is the person who signed the promissory note and is legally responsible for repaying a loan. Generally, for student loans, college students are the borrowers.
CALCULATOR
Use a student loan calculator to determine what your student loan monthly payments would be.
A student loan calculator will let you compare how much your total payments and total interest payments would be depending on your loan balance, the term of your loan, and the interest rate of your loan.
It is important to know how much it will cost and how long it will take to repay a student loan after graduation. Comparing different loan options with a calculator will help you see how student loans work.
Use this calculator to better understand the true cost of student loans.
CAPITALIZED INTEREST
Capitalized interest is unpaid, accumulated interest that is added to the principal of the loan. Then, interest is charged on that new higher principal amount, meaning that borrower is being charged interest on the interest.
The amount the borrower will have to spend to pay off the loan increases. The terms of whether and when interest is capitalized depends on the terms of your loan.
CONSOLIDATION LOAN
A consolidation loan allows a borrower to combine several individual loans into one single loan from one financial institution.
Consolidating multiple student loans can simplify a borrower’s paperwork, extend the repayment period, or lower the monthly payment, but may also increase the total cost of the loan.
COSIGNER
The cosigner signs the loan with the borrower. The cosigner is legally obligated to repay the loan if the borrower does not make payments.
This means that if a parent, grandparent, or other family members cosign on a college loans, and the student does not make the loan payments, the family member (the cosigner) will have to repay the loan amount.
Also, it’s important to note that some student loans state that if the cosigner dies, the loan goes into auto-default. That means that the borrower has to repay the loan within a short period of time. Carefully read the terms of each loan you consider to understand all the cosigner terms, as they vary by loan.
COST OF ATTENDANCE (COA)
The cost of attendance is the total cost of attending a certain college or university. It includes tuition, room, board, fees, books, transportation, and personal expenses.
CREDIT UNION
Unlike traditional banks, credit unions often offer student loans with competitive interest rates and borrower-friendly terms, as they operate on a not-for-profit basis and prioritize serving their members’ interests.
DEFAULT
When a borrower fails to repay their loan according to the terms of the loan, the loan goes into default. The borrower can face legal action from the lender.
DEFERMENT
Student loan deferment is an option for federal student loans. This federal repayment program allows you to pause student loan payments for up to three years. If you have a subsidized loan, you will not be responsible for interest charges during that time; if you have an unsubsidized loan, you will have to repay interest that accrues during the deferment period.
Deferring payment on student loans can be helpful if you are experiencing a hardship, but if your loan is unsubsidized, a deferment will make your total cost of repayment higher. Learn more at the Federal Student Aid website.
DELINQUENT
A loan is delinquent when the borrower has missed a loan payment (or paid it late). Eventually, delinquency will result in default.
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DEPENDENT
A dependent student is dependent on their parents. Their parents’ income and assets determine their financial aid eligibility.
DIRECT LOANS
Direct loans are made by the US Department of Education, not a private lender. Direct loans include Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans.
DISBURSEMENT
Disbursement is when a lender releases the funds being borrowed–when you receive the funds you are borrowing.
DISCLOSURE STATEMENT
The disclosure statement explains the total cost of your loan, including the principal amount borrowed, the interest costs, and any fees.
ENTRANCE COUNSELING
Entrance counseling is required for borrowers taking a Direct federal loan. Entrance counseling explains the loan and the commitment borrowers are making to repay their loans. This is required before loan disbursement.
EXIT COUNSELING
Exit counseling, also required for borrowers taking a Direct federal loan, provides students with information about repaying their loans. This takes place before students leave college.
EXPECTED FAMILY CONTRIBUTION (EFC)
The EFC is the amount of money reported on a Student Aid Report (SAR) that a student’s family is expected to pay toward the student’s education. The amount is determined after the student submits the Free Application for Federal Student Aid (FAFSA). However, colleges are not obligated to reduce the student’s cost to the EFC.
FEDERAL STUDENT LOANS
Federal student loans are offered to students to help pay for college expenses. They are supported and regulated by the federal government. They may be subsidized or unsubsidized.
FINANCIAL AID
Financial aid is the support a student receives to attend college. The financial aid may come from federally or privately funded sources and can include scholarships, grants, loans, and work-study programs.
FINANCIAL AID OFFICER
A financial aid officer is an employee of a college’s financial aid office. They help administer financial aid programs and put together financial aid packages.
FIXED INTEREST RATE
A fixed interest rate does not change throughout the life of the loan.
FORBEARANCE
Forbearance allows you to postpone or reduce monthly student loan payments for up to 12 months at a time. Under discretionary forbearance, your loan servicer determines if you qualify for forbearance because of financial difficulties. Under mandatory forbearance, the government requires loan servicers to allow you to pause your loan repayments because you meet certain criteria. When your loan is in forbearance, you will continue to accrue interest on your loan, regardless of the type of loan you have. Learn more at the Federal Student Aid website.
FREE APPLICATION FOR STUDENT AID (FAFSA)
The FAFSA is the first step towards financial aid for college. The FAFSA is a comprehensive form that must be filled out by anyone who wants to apply for federal or state financial aid. When filling out the FAFSA, you’ll need to include information such as your family size and annual family income.
Many colleges and universities require the FAFSA before they will offer a financial aid package. The financial aid offer you receive will specify if you qualify for federal student loans or income-based grants.
You will fill out the FAFSA each academic year.
GRACE PERIOD
The grace period is the time between when a borrower leaves school and when they have to make payments on a loan. This varies depending on the terms of the loan.
GUARANTEE FEE
A fee of up to 1 percent of the loan is charged to the borrower to insure the loan.
INCOME-DRIVEN REPAYMENT PLANS
If the cost of repaying your federal student loans is too high in relation to your income, you can apply for an income-driven repayment plan that bases the amount of your loan repayment on your income.
You must demonstrate that the amount of your student loan debt is a significant portion of your annual income. There are a variety of income-driven repayment plans to choose from. Learn more at the Federal Student Aid website.
INDEPENDENT STUDENT
An independent student is either 24 years old by December 31 of the award year; an orphan or a ward of the court; a US veteran; in active military service; married; responsible for legal dependents; self-sufficient; a graduate student; or declared independent by a financial aid administrator.
If you are taking graduate student loans, you are considered to be an independent student.
INTEREST
Interest is the percentage of the loan balance that is changed by the lender. Student loan interest rates vary widely.
Federal student loans have lower interest rates than private student loans. Shop around and compare interest rates before taking a loan. Understanding student loan interest is key before committing to a student loan.
ORIGINATION FEE
Origination fees or processing fees are charged by loan providers to offset the costs of creating, administering, and processing the loans.
PARENT LOAN FOR UNDERGRADUATE STUDENTS (PLUS Loans)
PLUS loans are federal loans with low interest rates. Parents can take out these loans on behalf of their undergraduate children to pay for educational expenses.
PRINCIPAL
The principal of a loan is the full amount borrowed. During repayment, the principal is the portion of the original amount still owed. The borrower must repay the principal and the interest.
PRIVATE STUDENT LOANS
Private student loans are made by a private lender, such as a bank or credit union, so that the borrower may pay for college expenses. Private student loans are based on the borrower’s credit history.
Private lenders set different interest rates and fees based on the credit score of the borrower and their company policies.
PROMISSORY NOTE
A promissory note is a binding legal document wherein the borrower promises to repay the lender a specified amount of money within a certain time frame. It states the terms and conditions of repayment.
REFINANCE
Refinancing student loans is when you take out a new loan to pay off one or more old student loans. If you refinance federal student loans with a private student loan, you lose the benefits of federal student loans.
Before you refinance student loans, be sure to compare terms and interest rates carefully. There are many student loan refinance companies, so be sure you find the best deal if you want to refinance your student loans.
REPAYMENT SCHEDULE
A repayment schedule lists the total amount owed, the amount of your monthly loan payments, and when each payment is due. Repayment plans may be fixed or based on your income.
STUDENT AID REPORT (SAR)
After submitting the FAFSA form, you will receive your Student Aid Report (SAR) within 3 days–2 weeks.
The SAR contains your Expected Family Contribution (EFC). Review the SAR carefully, and correct your FAFSA if you notice any errors. The colleges and universities you listed on your FAFSA will have access to your SAR.
The SAR helps colleges determine your financial need.
STUDENT LOANS
Student loans are money that students and parents can borrow to pay for costs associated with college education.
Student loans can be used to pay for college tuition, as well as a place to live, food, and books during college.
STUDENT LOAN FORGIVENESS
You may hear a lot about student loan forgiveness in the news. The student loan forgiveness of 2022 is not a blanket cancellation of student loans. And there’s no guarantee there will be any further loan forgiveness.
Do not take out student loans expecting that they will be forgiven. Plan to have to repay your loans in full.
Forgiveness of private loans is extremely rare, but there are programs that forgive federal student loans. However, they have very specific requirements that don’t apply to most borrowers. Learn more at the Federal Student Aid website.
STUDENT LOAN REPAYMENT
Different types of student loans have specific rules about when loan repayment must begin.
It’s very important that you understand the terms of each loan before you sign. Don’t assume that one loan has the same terms as another.
For example, some student loans require that if you are not enrolled in school at least half-time, you will have to begin repaying your student loans. Many loans offer a six-month grace period after graduation, before loan repayment begins.
SUBSIDIZED LOAN
Subsidized loans are need-based loans for undergraduate students with demonstrated financial need.
The U.S. Department of Education pays the interest on a subsidized loan while a student is in school and during grace periods and deferment periods.
UNSUBSIDIZED LOAN
The borrower is responsible for paying all interest on an unsubsidized student loans. Interest accrues from the date of disbursement until the loan is paid in full. An unsubsidized loan is subject to capitalized interest.
VARIABLE INTEREST RATE
Variable interest rates can either increase or decrease periodically (unlike fixed interest rates). Choosing a loan with variable rates can be risky, because if interest rates rise, your loan will become more expensive.
Final thoughts on understanding Student Loan Terms
Understanding student loans and the terminology used to understand them can be challenging and time-consuming. However, understanding student loan definitions can be an empowering step towards preparing to pay for higher education.
Armed with knowledge about different types of loans, interest rates, repayment plans, and other student loan terms, students and their families can more confidently navigate the world of student loan financing.
By making informed choices and using smart borrowing practices, students can prepare for a successful academic journey, a well-paying career, and a more secure financial future after graduation.
Understanding student loans can help you make the best choice between the different types of federal student loans and private student loan options. Picking the right loan is the first top in managing your student debt.
