Terms To Know
The following terms are some of the most commonly used when borrowing student loans and preparing for your repayment:
Principal- The actual dollar amount borrowed. When making payments, you will be paying down the principal.
Interest- The “cost” of borrowing; additional money you will be charged and expected to pay for taking out the loan. Interest is calculated based on a percentage rate of the principal. Interest rates can be either fixed or variable.
*Debt Management Strategy: When submitting payments, money always goes towards paying down interest FIRST. If you have extra money to contribute towards your student loan payment, be sure to specify you would like the funds to go towards paying down your principal. Otherwise, it could get held to pay off future interest.
Subsidized Student Loan- A type of educational loan in which interest will not accrue while the borrower is enrolled at least half time in a qualifying post-secondary education program as well as during a borrower's grace period and typically periods of loan deferment.
Unsubsidized Student Loan- A type of educational loan in which interest will accrue starting at the day of disbursement throughout the life of the loan.
Capitalization- When accumulated interest gets added to the principal to create a new, larger principal balance. Capitalization occurs anytime there is a “major event” in the life of the loan. This includes entering into repayment following a grace period or the ending of deferment or forbearance, and when a borrower enters into a new repayment plan.
To avoid or mitigate the impact of capitalization, consider paying down the interest on your loans while in school or a period of deferment or forbearance.
Lender- The entity that lends out money to the borrower. For most individuals, at least one of their lender will be the Department of Education through the Federal Government. Other lenders include private companies and banks.
Servicer- A third party entity hired by the lender to manage the borrower’s account by collecting and processing payments. Borrowers will work almost entirely with their servicer once they accept the loan from their lender, specifically during the repayment period of their student loans.
Grace Period- Time before repayment officially begins and payments are collected. For Direct Federal Loans, as well as various alternative and private loans, the duration of the grace period is 6 months.
Deferment- Temporary postponement of payments on a student loan; interest typically does not accrue on subsidized loans during this period. Eligibility for deferment is determined by specific criteria and qualifications, oftentimes requiring a formal application in order to receive it. Communicate with your servicer if you have questions about deferment.
Forbearance- Temporary reduction or postponement of payment amounts on a student loan; interest typically does accrue regardless of subsidized status during this period. Eligibility for forbearance is determined by specific criteria and qualifications, oftentimes requiring a formal application in order to receive it. Communicate with your servicer if you have questions about forbearance.
Consolidation- Combining multiple federal education loans into one federal loan. The result is a single, oftentimes lower, monthly payment instead of multiple payments paid out over a longer repayment period. Learn more about consolidation by reaching out to your servicer and by reviewing our Debt Management Strategies section.
Refinancing- Replacing an existing loan with a new loan, usually to find a lower interest rate and better repayment terms. For federal borrowers, refinancing means losing benefits such as repayment plan options. Speak with your servicer about refinancing, weigh all of the pros and cons of refinancing, and review our Debt Management Strategies section to determine if
Default- Delinquency status that occurs after 270 days of consecutive missed payments. Once a loan has gone into default, the account is sent to collections. A loan in default has major, negative consequences including wage garnishing, tax refund withholding, and negative credit reporting. If you believe you are at risk of defaulting on your loan or are currently in default, please contact your servicer. More often than not, there are ways that your servicer can work with you to rehabilitate your loan.