When it comes to student loans and finances, we know there can be a lot of terms that you may have never heard before. We have compiled a list of definitions to help you understand more about your student loans and some of the terminology used.1

Accrue: Interest accumulates until a debt is completely paid off. The rate of accrual is determined by the unpaid balance of the original loan.

Annual percentage rate (APR): Amount shown as a percentage that represents yearly costs of borrowing over the term of the loan.

Capitalization: Adding unpaid interest to the original amount borrowed.

Consolidation: A type of loan that allows you to combine several student loans into one larger loan.

Co-signer: A person who also agrees to repay a loan. Co-signers are equally responsible and legally obligated to repay the loan. Co-signers should consider whether they are willing and able to repay the loan if the student borrower does not repay the loan on time.

Debt-to-income ratio: Measure that compares personal debt payments to personal income. A high ratio means the borrower faces a greater burden repaying debts and more difficulty accessing other financing options.

Default: Failure to repay a loan outlined in the agreed promissory note. Most federal student loan default occurs when a payment isn’t made in more than 270 days. It can result in legal consequences and a loss of eligibility for additional federal student aid.

Deferment: A temporary postponement of payment on a loan that is allowed under certain conditions and during which interest generally doesn’t accrue on certain types of subsidized loans.

Delinquency: Loan or account status when a borrower misses payments as specified by the repayment period in the loan agreement.

Federal loans: Loans managed and backed by the US government. These loans are designed to provide students with fair treatment. Because they offer the best terms for borrowers, federal loans are often considered the best option for students.

Forbearance: A period of time when your monthly loan payments are temporarily stopped or reduced. Interest will continue to be charged on your loans. Be aware that unpaid interest may be capitalized (added to your loan principal balance) at the end of your forbearance period.

Grace period: Period of time between graduation or leaving full-time college enrollment and making the first payment on a student loan.

Income-driven repayment plan: A federal student loan repayment program that adjusts the amount you owe each month based on your income and family size.

Interest rate (annual): A percentage that determines how much your loan balance increases each year.

Lender: A lender is an organization that made the loan (e.g., borrower’s school, bank, credit union, etc.).

Loan forgiveness: A plan offered to encourage certain types of employment. A loan may be fully or partially forgiven after a certain number of years of qualifying employment.

Loan servicer: The company that sends you your bill each month. Servicers are companies that collect payments on a loan, respond to customer service inquiries, and handle other administrative tasks associated with maintaining a loan.

Principal balance: The amount owed, less interest, or other charges.

Private loans: Loans managed and backed by private banks. These banks are not subject to the same rules and regulations of federal loans and may feature higher (or variable) interest rates, stricter repayment plans, and penalties, or other terms that may make them more expensive.

Reamoritization: This occurs if at some point the lender recalculates the monthly payments during the repayment term.

Refinance: When an individual replaces an old loan with a new loan at a different interest rate.

Repayment term: Agreed time period for loan repayment.

Subsidized loans: These are typically federal student loans. For all subsidized federal student loans, the US Department of Education subsidizes (pays the interest on) your loan while you are in school and during periods of deferment, such as during military service.

Unsubsidized loans: A loan borrowed through the Direct Loan Program offers students a low, fixed interest rate and flexible repayment terms. It is not based on financial need. The borrower is responsible for paying all the accumulated interest until the loan balance is paid off.

 

  1. Definitions sourced from the Consumer Financial Protection Bureau (consumerfinance.gov/consumer-tools/student-loans/answers/key-terms/), the US Department of Education Office of Federal Student Aid, (https://studentaid.gov/help-center/answers/topic/glossary/articles/), and Debt.org (www.debt.org/glossary/).

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