Student Loans 101: Vocabulary

Money and college can be confusing. Whether you’re just starting out on your college journey or dealing with student loans from years ago, here is a glossary of helpful terms you may need to know:

Accredited: If your college and program is accredited, it means that it has met specific requirements by the U.S. Department of Education. You’ll have to attend an accredited school to get federal loans or use any federal aid.

Administrative Wage Garnishment: If your federal student loans go into default, the federal government has the ability to take up to 15% of your disposable income directly from your employer.

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APR/Annual Percentage Rate: This percentage is the interest rate you will pay on your loan.

Auto-Debit: This allows your lender to automatically deduct a payment from your checking account every month. Some lenders offer a small reduction in your interest rate if you sign up for this. This can also ensure you avoid late fees.

Award Letter: You’ll receive this letter from your intended college. It will tell you the type of financial aid you qualify for along with the amount. You’ll also see your Expected Family Contribution and your school’s Cost of Attendance.

Borrower: This is the person who is legally responsible for the student loans. You may have loans where you are the borrower, and loans where a parent is the borrower.

Cancellation: In very rare circumstances, you may hear of a student loan being canceled. If your college was closed before you could complete your course of study, you may be eligible to have your loans cancelled. Cancellation may also occur if a borrower has a serious disability or dies.

Capitalization: This is when all of the unpaid interest is added right to the principal balance of your student loan. This occurs when you start repaying your loans or when any deferment or grace period ends.

Cost of Attendance (COA): This is the estimated amount that you will pay (or paid) for attending your specific college. This amount includes tuition, books, supplies, and room and board.

Consolidation: Once you’re ready to repay your loans, you can have them consolidated, which means combining all of your loans into one loan. A benefit to this is making it easier to keep track of your debt, since now you only have one loan instead of several. Plus, you may be able to get a lower interest rate. However, on the flip side, consolidating loans can also mean losing certain benefits, such as loan forgiveness. To determine if consolidating your loans is a beneficial option, check out our student loan consolidation guide.

Debt-to-Income Ratio: Your debt-to-income ratio is what it sounds like: It’s the amount of debt you have compared to your income. This is a standard item lenders will look at to determine whether you’ll be eligible for a loan. If you have a lot of student loan debt, you may not be eligible for other types of loans and credit, including credit cards, a car loan, or a mortgage loan, for example. This is also looked at when determining what type of student loan repayment plan you’ll be eligible for.

Default: Your student loan is considered in default if you fail to make a payment for 270 days. A loan going into default is bad news. Besides harming your credit, you can also lose eligibility for federal student aid, lose the ability for deferment, forbearance, or other repayment plans, and you may even have your federal and state taxes withheld through a tax offset.

Deferment: A deferment is a set period of time during which repayment of your student loans is delayed. There are many different types of deferment, including in-school, unemployment, economic hardship, or active duty military service. You will often need to apply for deferment through your lender by completing an application and providing proof and/or documentation of your eligibility.

Delinquency: The first day you miss your scheduled student loan payment, it is considered a delinquent loan. Your loan will be considered delinquent until you bring your loan current. After 90 days of a loan being delinquent, your lender reports it to the major credit bureaus.

Dependency Status: Your dependency status determines whether if you are considered a dependent student or an independent student. This will impact what information you are required to share on your Free Application for Federal Student Aid (FAFSA) and what types of financial aid you might be eligible for.

Dependent: As a dependent, it is assumed you have support from your parents, and therefore you are required to include your parents’ information on the FAFSA.

Direct Consolidation Loan: This would allow you to combine multiple federal loans into one single loan. This could make it easier to deal with your loan; however, it could also result in the loss of certain loan benefits.

Direct Loan: This is a federal loan that borrowers (including students and parents) can get directly from the U.S. Department of Education. These loans include Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans.

Disbursement: This is the payment of your funds by your school.

Discharge: If a loan is discharged, it means you (as the borrower) are released from the obligation to repay your loan.

Discretionary Income: For the Income-Based Repayment plan or the Pay As You Earn repayment plan, your discretionary income is the difference between your current income and 150 percent of the poverty guideline in the state you live in for a family of your size. For the Income-Contingent Repayment plan, it is the difference between your income and 100 percent of the poverty guidelines.

Disposable Income: This is the amount that remains from your pay after any deductions.

Economic Hardship Deferment: If you are currently working full-time (at least 30 hours per week) but still have trouble making your payments, you may qualify for this deferment.

Enrollment Status: This is how you are currently attending your college. It can include full-time, part-time, half-time, or less than half-time. If your enrollment status drops to less than half-time, your student loans are eligible to kick in. Enrollment status can also include withdrawn or graduated.

Estimated Family Contribution: If you are a dependent, you are required to submit your parent’s financial information on your FAFSA. Once you do, you will receive your estimated family contribution, a dollar amount that your family is expected to contribute and, therefore, will affect your eligibility for financial aid.

Exit Counseling: When you are graduating or attending school less than half-time, you’ll need to take exit counseling. It is an information session that will explain to you how repayment of your student loans will work and your responsibilities.

FAFSA: FAFSA is the Free Application for Federal Student Aid. Fill this out before each academic year to see what federal aid you qualify for, including grants, federal loans, or a work-study program.

Federal Loan: A federal loan is one that comes directly from the U.S. Department of Education, as opposed to a private lender.

Federal Family Education Loan Program: Also known as FFEL, this expired program allowed private lenders to give loans to borrowers that were guaranteed by the government. But now, all federal loans come directly from the Department of Education.

Forgiveness: Depending on the type of your loan, you may qualify for a portion to be forgiven. This means that those loans get “erased” and you no longer owe that portion of the loan.

Forbearance: Depending on the type of loan you have and your lender, you can qualify for a forbearance if you are having trouble making your payments. A forbearance allows you to stop making payments for 12 months while interest will continue to accrue.

Grace Period: Most lenders offer a grace period, a certain amount of time after you graduate or stop attending college full-time, when you do not yet have to make payments on your student loans. But try to avoid the tempting option of simply ignoring your debt during this period. You could always try refinancing your loans after this period to score a better interest rate

Graduate PLUS Loan: This is a federal loan that is used to cover the costs of graduate school.

Grant: A grant is essentially free money that is used to apply towards your education that does not need to be paid back. A grant is similar to a scholarship, but grants are often need-based, while scholarships are often based on merit, athletic ability, or affiliations. You can find grants by filing out the FAFSA, talking with your financial aid office, and researching other grant resources online.

Gross Annual Income: Your gross annual income is the income you earned in one year before taxes. Gross Annual Income (GAI) will be used when filling out the FAFSA, applying for loans, and to determine your repayment plan once you are paying back your student loans.

In-School Deferment: This type of deferment is used when you are currently enrolled in a college, generally for more than half-time. If you are in school, you can defer, or temporarily stop making payments, for the time you are enrolled.

In-State: Generally, each college offers an in-state tuition rate and an out-of-state tuition rate. If you choose to attend a college in the state you legally reside, you will pay in-state tuition, which is generally lower than out-of-state.

Income-Based Repayment: This is one of the student loan repayment plans designed to lower your monthly payments, based upon your current income. This specific plan, also known as IBR, caps your payment at 15 percent of your discretionary income.

Independent Student: If you are considered an independent student, you are thought to be receiving no assistance from your family.

Interest Rate: You must pay interest to your lender in exchange for borrowing the money. The dollar amount of interest owed is calculated using a percentage of the debt — for example, 6.25% —  your interest rate. A fixed interest rate will not go up or down during the term of the loan, whereas variable interest rates can shift depending on financial markets.

Lender: The lender is the organization that gave you a loan. A lender could be the U.S. Department of Education (for federal loans), a bank, credit union, your school, or another lending institution, such as Sallie Mae.

Out-of-State: Generally, each college offers an in-state tuition rate and an out-of-state tuition rate. If you choose to attend a college in a state where you don’t legally reside, you will pay out-of-state tuition, which is generally higher than in-state.

Outstanding Principal: This is the total sum of the money borrowed on the specific loan, including any capitalized interest.

Pay As You Earn: This is one of the income-driven repayment plans for student loans designed to make your monthly payments lower, based upon your current income. The Pay As You Earn plan caps your payments at 10 percent of your discretionary income.

Perkins Loan: This is a federal loan with low interest, where your school is the lender. Funds will depend on what your financial need is and what is available from your college.

PLUS Loan: There are Graduate PLUS loans and Parent PLUS loans. These PLUS loans are either for graduate students to help fund their education or for parents of undergraduates to help them pay for their tuition.

Principal: This is the outstanding balance of your loan, without any future interest and fees.

Private Loan: This type of loan is given by a private company instead of the federal government. You may receive or have received a private loan from a bank, credit union, your school, state agency, or common loan providers such as Sallie Mae.

Promissory Note: This is what you will sign to agree to the terms of your student loan payback.

Subsidized: The federal government will pay interest that accrues during your grace period, unless it occurred between July 2012 and July 2014.

Unemployment Deferment: If you are actively seeking employment and you’re unable to pay your student loan minimum payments, you can apply for an unemployment deferment. This will temporarily postpone your payments.

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Unsubsidized: Unlike subsidized loans, you are responsible for your interest on loans during all periods.

Work-Study: This is a type of federal aid. This particular program provides part-time jobs for undergraduates and graduate students with financial need. Your college needs to participate in this program to be eligible.