A Guide to Important Student Loan Terms

Student loans can have a language all their own. Understanding these 20 essential loan-related terms can help you navigate the world of student loans.

1. Federal student loans – Many of these student loans (e.g., Direct Loans) are owned by the U.S. Department of Education. Certain other federal loan types (commercially-held Federal Family Education loans) are owned by guarantee agencies and private companies; however, such loans are no longer being made. Federal student loans generally don’t require you to have a credit history, with some exceptions, or a cosigner. If you are allowed a grace period, you won’t have to repay these student loans until you graduate or change your enrollment status to less than half-time. Federal student loans first disbursed on or after July 1, 2006 have a fixed interest rate. Federal loans generally offer more repayment options than private student loans, with some of the benefits including deferment, forbearance, forgiveness, and Income-Driven Repayment (IDR) plans. They also may be included in temporary relief, such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
2. Private student loans – Student loans that are offered by a variety of banks, credit unions, and state-based or state-affiliated organizations are referred to as private student loans. You can learn about these loan programs through your bank or credit union, your university or college’s financial aid office, a friend or relative’s recommendation, or online research. The terms and conditions of these student loans are set by the lender. Interest rates may be fixed or variable, and may be higher than interest rates on federal student loans, depending on your credit history and financial circumstances. These loans often require you to have an established credit history or a cosigner. Some private lenders, like Nelnet Bank, allow eligible cosigners to be released after a certain number of consecutive, on-time monthly payments. There are many differences in fees, penalties, policies, and options for repayment of your loans, so you’ll want to do your research to make sure you get options and protections for your situation.
3. Loan application – A document that provides the essential information about the borrower, or cosigner, on which the lender bases the decision to lend.
4. Promissory note (or Credit Agreement) – A promissory note (also called a credit agreement) is a document that you will sign agreeing to the terms and conditions, and promising to repay the loan.
5. Cosigner – A person who agrees to be responsible for repaying your student loan if you don’t make your monthly payments.
6. Disbursement – A distribution of funds from the lender for your loan.
7. Loan term – The length of time available for you to repay your loan.
8. Principal – The initial balance of your loan (the amount you borrowed and have to pay back). This term can also refer to the amount still owed on a loan.
9. Interest – What a lender charges for lending you the money. It is a calculation based on an interest rate and outstanding principal balance.
10. Fixed interest rate – Interest rate set at the beginning of the loan term and will not change over time.
11. Variable interest rate – The interest rate will change, on a recurring basis, throughout the loan term. With this type of program, it’s important to be aware that your monthly payments may fluctuate over time, which may increase the cost of borrowing.
12. Capitalization – The process of adding unpaid accrued interest to the principal balance of your loan. This may occur when your loan enters repayment after grace or the end of a deferment or forbearance. When loan interest capitalizes, it makes your principal balance larger.
13. Grace period – A period of time after you leave school when you aren’t required to make full monthly loan payments. While most lenders offer some sort of grace period, you will need to check the length of time and payments required.
14. Repayment – This is the period when you are required to repay the loan. Some student loans enter repayment immediately after disbursement, while others may not begin repayment until after a grace period.
15. Interest-only payments – Some student loan lenders offer periods of time that allow you to make interest-only payments. While the principal balance stays the same, you can prevent the interest from capitalizing and increasing your student loan balance.
16. Deferment – Allows you to temporarily postpone or reduce your monthly payment amount for a specified period. During this time on private student loans, interest may continue to accrue and may be capitalized at the end of the deferment.
17. Forbearance – Allows you to temporarily postpone or reduce your monthly payment amount for a specified period of time. During this time on private student loans, interest will continue to accrue and may be capitalized at the end of the forbearance.
18. Income-Driven Repayment (IDR) Plans – IDR plans are available for federal student loans and are designed to make repayment more manageable. These plans reduce monthly payment amounts based on your income, family size, and student loan debt. These plans may also result in a loan forgiveness option. If you have private student loans, check with your lender or servicer for alternative payment options.
19. Forgiveness – An opportunity to have some or all of your student loan debt forgiven, in particular, if you work for a nonprofit, certain low-income school districts, or some government sectors and make a certain number of on-time payments. This is generally only available with federal student loans. Loan forgiveness may be considered taxable income.
20. Student loan refinancing – The process of obtaining a new student loan to pay off an old student loan(s) with new terms. You may want to refinance one or more of your student loans into a new refinance loan when interest rates are lower, which may save you money and make it more convenient to pay off multiple loans. Refinancing your federal student loans into a private loan may cause you to lose certain benefits.

Phew! There are more terms, but that might be enough for today.

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