While student loans may seem confusing, they’re much easier to manage when you understand how they work, and these key terms can help you do just that. From amortization to loan servicer, here are 10 key essential terms you should know:
1. Annual Percentage Rate (APR)
When you take out a loan, you agree to repay the loan with interest. Your loan APR is a percentage that represents the yearly cost of the loan along with interest and fees.
Federal student loans have fixed APRs, while private student loans can have fixed or variable APRs, meaning the rate may change over time.
2. Amortization
Amortization is a process where your loan is repaid over a period of time in fixed installments. With student loans, the loan term is usually 10 to 15 years, and your monthly payment is split between your principal — the amount you initially borrowed — and interest, or the cost of borrowing money.
When your loans first enter repayment, a significant amount of your monthly payment amount goes toward the loan’s interest rather than the principal. Over time, you gradually pay more toward the principal until the loan is paid in full.
Understanding amortization helps you see how your payments chip away at the balance (and learn how extra payments can allow you to save money and pay off your debt faster).
You can use a student loan calculator to estimate how extra payments will accelerate your repayment.
3. Capitalized
With student loans, interest can cause you to owe more over time., If your loans are in forbearance, deferment, or at the end of a grace period, the interest is capitalized, or added to the loan’s principal balance.
For example, let’s say you have $20,000 in loans and $1,000 in unpaid interest. If the interest is capitalized, your new balance is $21,000, and interest will accrue on the new, higher total.
4. Cosigner
With private student loans, you may have a cosigner (a parent, relative, or good friend with solid credit and reliable income) on your loan. A student loan cosigner is responsible for repaying the loan if you fall behind on the payments, and the loan can affect their credit and their ability to qualify for other forms of credit.
5. Default
When you miss a loan payment, your account is delinquent. When you miss several payments — such as being late for 90 to 270 days — the loan enters default. Defaulting on a student loan can have serious consequences; for federal loans, the consequences can include wage garnishment, damaged credit, and ineligibility for future financial aid.
6. Deferment
A deferment allows you to temporarily pause your student loan payments. Typically available on federal loans, you may qualify for a deferment if you return to school or serve in the military.
With subsidized federal student loans, the government covers the interest that accrues during the deferment, so your balance won’t grow. But, for all other federal or private student loans, interest accrues and, if unpaid, will be capitalized.
7. Forbearance
Like deferments, forbearance allows you to pause your loan payments. But, forbearance tends to be for longer periods, and interest accrues on all loan types.
8. Grace Period
With most federal student loans and some private loans, there is a grace period, or a period of time between when you graduate or leave school and when your loans enter repayment. For most loans, the grace period is six months. This period gives you time to find a job, create a budget, and get your finances in order before you have to start making payments toward your loans.
While payments aren’t required during the grace period, making payments during this time can be a smart idea; your payments will decrease the amount of interest that builds and is capitalized.
Not all loans have grace periods, so check your loan agreement to find out when payments are due.
9. Promissory Note
As a student loan borrower, you have to fill out a promissory note before you can receive the loan funds. The promissory note is a legal document that outlines the terms and conditions of your loan.
A promissory note includes details like:
- Your interest rate and repayment schedule
- The principal of the loan
- Your repayment options and responsibilities as a borrower or cosigner
By signing the promissory note, you’re signing a contract, and you commit to repaying the loan according to the listed terms.
10. Student Loan Servicer
Your student loan servicer is the company that handles your loans. Your servicer may be the lender, or it may be a third-party company hired by the lender to manage the loan program. For example, the U.S. Department of Education runs the federal student loan program, but they use third-party companies like Mohela and Nelnet to handle borrower accounts and questions.
Your loan servicer can change over the life of your loan, so it’s important to keep your contact information up to date on your student loan account so you’ll receive notifications of any changes.
Managing Your Student Loans with Confidence
Student loans may feel daunting, but getting familiar with key terms like capitalization and APR can make you feel more comfortable and confident. Whether you’re in school or getting ready to repay your loans for the first time, understanding how your loans work makes it easier to manage your debt.
Looking for further assistance? ELFI’s award-winning team of student loan advisors can help you navigate the choices ahead. Contact us today or begin by checking your rate estimate without impacting your credit.
