Glossary of Student Loan Refinancing TermsOctober 7, 2020
There are so many terms that borrower’s encounter in the student loan application process, most borrowers may not be exactly sure what each means. If you’re getting ready to apply or just want to know what the documents are talking about, here’s our glossary of common student loan terms that you should know.
Adjusted Gross Income (AGI) and Gross Income
Gross income is the total amount you earn in a year before deductions for federal or state taxes, credits, and so on. Adjusted gross income is the income you earn in a year that is eligible to be taxed after accounting for deductions. AGI is usually lower than your gross income. It’s what many institutions use to determine if you can get perks like loan tax benefits or financial aid, grants, etc. The easiest place to find these are on your official tax return.
Adverse Action Letter
If you’re denied for a loan due to something negative on your credit report, the lender might be required to send you one of these. It explains why you were turned down, and it’s important because it enables you to see if something is wrong on your credit report.
This term describes how the principal is paid over the course of a loan. Most student loans are fully amortized, meaning that if all payments are made as scheduled, the principal balance will be fully repaid at the maturity date.
Other types of loans, including some types of mortgage loans, have a feature known as a balloon payment. With a balloon payment, regularly scheduled payments do not fully repay the principal amount borrowed. When the loan matures, the final payment contains a larger, or balloon, payment of all remaining principal.
Annual Loan Limit
This is the maximum loan amount you can borrow for an academic year. Loan limits can vary by facts like grade level and loan type.
If you received financial aid, expect to see an award letter that explains the different types of aid for which you are eligible. The document will also include information about your loans, grants, or scholarships, and you’ll see a new one each year that you’re in school.
The person who is responsible for paying back a student loan. You may not be the only one responsible, like if you signed with a cosigner, but the loan is for you and your academic fees and tuition.
When unpaid interest is added to the principal balance (increasing your overall balance and future interest), this is called capitalization. This is why it’s important to pay interest whenever possible. Capitalization might happen at the end of a grace period or deferment, or after forbearance, depending on whether it’s a federal or private loan. Capitalization may occur when a loan is consolidated or if it enters default.
A cosigner is someone who can apply with you for a loan and who is also legally responsible for the loan. If you do not meet the minimum requirements for refinancing or want to qualify for a better interest rate, you may choose to apply with a cosigner.
For the best chance of receiving competitive rates, your cosigner should be someone with a strong credit history and score. If you already have a cosigner on a loan and are able to afford the loan without them, refinancing is one way to remove your cosigner from further financial obligation.
When you refinance your student loans, you essentially consolidate them into one loan. By refinancing and consolidating multiple loans into one, you can lower your interest rate, save money and enjoy the ease of only making one student loan payment.
If you have only federal student loans, you can consolidate multiple federal loans into one federal loan. However, this process does not lower your interest rate and will not save you money.
Debt-to-Income ratio is an extremely important student loan term that many people are unfamiliar with. Your debt-to-income ratio is a formula lenders use to determine if your income can cover all of your debts, including the new loan you are applying for. The lower the ratio the better because it shows you have enough income to pay your debts.
Typically lenders require a ratio of less than 50%, however, to qualify for the best interest rates, you’ll need an even lower ratio. To determine your debt-to-income ratio, divide your monthly debt payments by your monthly income. The debt-to-income ratio includes mortgage or rent payments, credit card payments, car loans, child support and alimony obligations, and personal loans.
A loan is considered delinquent when a scheduled payment is not made in a timely manner. Delinquency can result in the imposition of late charges, collection calls or letters, and negative information being placed on a credit report.
Default is when the lender determines that the borrower has failed to honor the terms of the loan agreement. In cases of default, the lender can declare the entire loan balance due and payable, even if the loan has not yet reached its maturity date. Serious delinquency is very often the reason for a loan being declared in default. Before entering into a loan agreement, always read the loan agreement carefully to understand what constitutes a default under that loan.
A period of time when payments are not required on federal student loans. To receive a deferment, you must receive special permission from your loan servicer and meet certain qualifications. You may qualify for a deferment if you are unemployed or enrolled in school at least part-time. The loan will continue to accrue interest unless it is subsidized. Some private lenders may allow you to defer payments, but you have to check with your provider to find out whether that is an option.
This is when your school receives funds like financial aid money or student loan funds. The institution then applies it to your bill for tuition and school-related fees. If you consolidate, the disbursement happens when money is sent to pay off your old loans.
When some or all of your student loan debt is canceled, this is called discharge.
Entrance/Exit Interview or Counseling
Schools provide entrance or exit counseling to help students understand important financial topics like how to repay student loans. This can happen during enrollment or after graduation.
Expected Family Contribution (EFC)
This amount is an estimate based on how much money you, your spouse, and/or family can contribute to your tuition for the academic year. It’s calculated with the information provided on your FAFSA and helps determine your financial need. Financial need is calculated as the cost of attendance minus your EFC. This determines your eligibility for aid including Stafford loans, Perkins loans, scholarships, and grants.
Fixed or Variable Interest Rate
If an interest rate cannot change over time, it is fixed. A variable interest rate can change over the life of the loan. Variable rates can move up or down based upon changes to an identified index, such a prime rate, a particular U.S. Treasury note, or LIBOR. LIBOR stands for the London Interbank Offered Rate, and is an index commonly used with student loans. Some variable rate loans may have a “cap” and/or a “floor.” A cap is the maximum rate that can be applied to the loan, regardless of changes to the index. A floor is just the opposite – the minimum rate for the loan regardless of changes to the index.
Like deferment, forbearance is when no student loan payments are due for a specified amount of time. You do not need to have a qualifying event for forbearance, but you do need to contact your servicer to request forbearance.
In forbearance, all loans will continue to accrue interest, so the amount you owe will increase. If your payments are too high to fit your budget, you may want to consider refinancing your loans rather than relying on forbearance.
Free Application for Federal Student Aid (FAFSA)
FAFSA is the application a student must complete to apply for any type of federal student aid including loans, grants, or scholarships.
The amount of hours you’re taking in school, which can affect different aspects of student loan financing and repayment. Part-time is usually six credit hours and full-time is twelve, but this can vary.
Most student lenders offer a grace period, a specified amount of time that you are not required to make student loan payments, immediately after you graduate from school. For federal student loans the grace period is usually six months. For private student loans, it varies based on the lender. Some lenders offer a six-month grace period and others require immediate payment.
During the grace period, interest will continue to accrue on your federal student loan. If you are thinking of refinancing your loans and do not have a job yet, it may be advantageous to use the grace period to start earning a stable income so you will be able to qualify for refinancing. If you have a job and are ready to start paying down your loans, refinancing before your grace period ends may help you save more, so you can start taking advantage of a lower interest rate.
While actively enrolled in school, you might be able to postpone your federal or private student loan payments until you graduate or drop below half-time.
The interest rate is the additional amount you pay to borrow the loan. An interest rate can be a variable rate or a fixed rate. A variable interest rate can change throughout the life of the loan. A variable interest rate is usually based on the LIBOR rate. If if the LIBOR rate rises, your interest rate will rise too. Most loans, however, have a limit on how high the interest rate can rise. A fixed interest rate stays the same throughout the entire student loan term. When you refinance your loan, you will be obtaining a new interest rate which can lead to significant savings.
When you qualify for certain programs, you may be able to have the final balance of your loans forgiven after a certain period of time. There are specific criteria for eligibility and usually a detailed application process.
Master Promissory Note (MPN)
This document states the terms of repayment for your student loans. It is the official document proving your commitment to repay the money you borrowed with interest. To receive federal loans, all borrowers must sign an MPN.
The principal balance is the original amount of money borrowed from the lender. It doesn’t include interest or fees that are either unpaid or yet to accrue.
Private Student Loan
You can borrow private student loans through banks, credit unions or other private lenders. This is in contrast to federal loans, which the U.S. Department of Education manages. Private student loans usually have lower interest rates than federal student loans. They are not, however, eligible for certain federal student loan benefits like loan forgiveness.
This amount of time is what you have to repay your student loans. The standard repayment period for Stafford loans is ten years but can be extended with reduced repayment plans. The longer you take to pay your loans, usually, the more you end up paying in interest. A repayment plan is a formal agreement you have with a servicer that details how you plan to repay your loans each month.
These terms represent all of your rights and responsibilities for the student loan, including what you’ll pay for monthly payments. Lenders must disclose the repayment terms to you before you commit to borrowing a loan.
Right to Cancel
Once the borrower accepts an approved application, the federal Truth in Lending Act requires the lender to provide a Final Truth in Lending disclosure statement. This final disclosure statement includes a three business day right to cancel. During that time, the borrower can change their mind and cancel the loan. To protect borrowers, the lender cannot disburse the loan proceeds until the right to cancel period has expired.
The loan servicer handles your student loan billing, including collecting payments and assisting with customer service questions.
Student Aid Report (SAR)
The SAR is a detailed list of all of the financial and personal information you submitted for your FAFSA, including financial info for your family. Your school receives a copy of this and you should receive one as well.
Student Loan Refinancing
Student loan refinancing is when you borrow a new private student loan to pay off federal or private student loans, or a combination of both. This will essentially consolidate many loans into one. The only way to refinance is with a private student loan. Refinancing can help obtain a lower interest rate and is a great way to save money on your loans. You could see monthly savings and save thousands of dollars in interest costs over the life of the loan. You can also shorten or extend your repayment term to better fit your financial situation.
Subsidized and Unsubsidized Loans
While in school and during your grace period, the government pays the interest on your subsidized loans so you don’t have to. Federal loans that are not based on financial need are unsubsidized, meaning you’re responsible for paying the interest that accrues.
Hopefully, learning these student loan terms helps you feel more confident and guides you in making sound financial decisions. To see how refinancing your student loans with ELFI could help you earn a better interest rate, try our Student Loan Refinancing Calculator.*
*Subject to credit approval. Terms and conditions apply.
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