by Matthew Frankel, CFP, The Motley Fool & contributor to Big 6 Big Time
Don’t start the financial aid process until you’ve read this list.
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If you’re new to the student loan process, the terminology can be confusing. To make things easier, here’s a list of student loan terms that borrowers should know.
Annual percentage rate (APR)
The true cost of borrowing money, including interest rates and origination fees.
The interest rate isn’t the only cost of obtaining a loan — that’s where APR comes in. This is the best way to get an apples-to-apples comparison between two or more loan options.
A payment agreement that allows a creditor to automatically deduct payments from your bank account.
When you repay a student loan, you have two choices for making payments. You can make each payment manually or use autopay (though some lenders might call it something else). Autopay generally gets you a 0.25% interest rate discount.
Taking your existing loans (typically federal student loans) and combining them into one.
You’ll technically have a new loan, but the interest rate will be based on the rates of the loans you’re consolidating. This term is often used interchangeably with refinancing but isn’t actually the same.
A creditworthy individual who is willing to accept legal responsibility for making a student’s loan payments.
Private lenders may require cosigners when applicants don’t have an established credit history or enough income to justify a student loan. In most cases, a cosigner can be released from a loan after making a certain number of on-time payments.
Cost of attendance
A number determined by the school that reflects the total cost of attending school for a year.
This includes tuition, fees, housing, meals, transportation, and more. Many lenders base the maximum student loan amount on schools’ cost of attendance.
Postponing or reducing your student loan payments for a certain period of time.
An in-school deferment, for example, allows you to skip loan payments while you’re attending school. A hardship deferment allows you to postpone payments if you fall on tough financial times. If you have subsidized loans, interest won’t accrue during deferment.
A loan made by the U.S. Department of Education under the William D. Ford Federal Direct Loan Program.
This includes subsidized and unsubsidized loans made to undergraduate and graduate students, as well as PLUS loans made to graduate students and parents of dependent students. Most federal student loans today are direct loans.
Extended repayment plan
A federal student loan repayment option that consists of equal monthly payments.
This is similar to the standard plan. The difference is that the extended repayment plan stretches repayment over a longer period of time (up to 25 years). This results in a lower monthly payment but more interest over the term of the loan.
An interest rate that stays the same for the entire term of a loan.
Say you get a 10-year fixed-rate loan with a 5% interest rate. Interest will be calculated a 5% for the entire 10-year term.
Temporarily postponing or reducing your student loan payments.
This is generally associated with periods of financial difficulty, like unemployment. Unlike a deferment, interest accrues on all of your student loans during forbearance. That includes subsidized student loans.
Free Application for Federal Student Aid (FAFSA)
The form you use to apply for federal student aid, including grants, work-study programs, and federal student loans.
You’ll need information about your and your family’s financial situation and the school you plan to attend. This information determines your financial need and eligibility for certain types of aid.
A six-month window after graduating or leaving school before repayment must begin.
If you graduate college in May 2019, a six-month grace period means your first student loan payment isn’t due until November. This is standard practice for both federal and private student lenders.
A low monthly payment that gradually gets higher over the course of the loan’s term.
This is a repayment option for federal student loans, but it’s important to note that graduated repayment is not an eligible repayment plan for Public Service Loan Forgiveness.
A type of student aid that doesn’t need to be repaid.
This isn’t technically a student loan term, but it’s important for borrowers to understand the difference between grants and loans when reading financial aid award letters.
A loan payment plan that limits the monthly payment to a certain percentage of the borrower’s discretionary income.
There are four different income-driven plans: Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), income-based repayment (IBR), and income-contingent repayment (ICR).
The rate at which interest is assessed on your outstanding loan balance.
If you owe $10,000 at an 8% interest rate, your next month’s payment will be based on an annualized interest charge of $800 ($66.67 for the month).
What the U.S. Department of Education calls its loans’ origination fees.
The loan fee for the 2018–19 school year is 1.062% of the loan amount for Direct Subsidized and Unsubsidized Loans. It’s 4.248% of the loan amount for Direct PLUS Loans made to parents and graduate students. You’ll pay this fee when you get the loan.
An upfront charge paid to a lender when borrowing money.
Origination fees may be expressed as a set dollar amount, such as $500, or as a percentage of the loan amount. Many student lenders don’t charge origination fees, but some (including the federal government) do.
A type of federal student loan designed to cover educational expenses that exceed a student’s borrowing capacity for Direct Subsidized and Unsubsidized Loans.
This is also known as a Direct PLUS Loan. These loans can be made to parents of dependent students and graduate students.
Private student loan
Any student loan not made or guaranteed by the U.S. government.
The lenders on our best student loans page all offer private student loans.
Public Service Loan Forgiveness (PSLF)
A program that forgives student debts accrued by public service employees.
This requires eligible Direct student loans, 120 on-time monthly payments under a qualified repayment plan, and qualifying public service employment.
Getting a completely new loan for the purpose of repaying your existing loans.
When refinancing student loans, you need to qualify for the new loan, either on your own or along with a cosigner, and you’ll receive an interest rate based on your qualifications. Similar to — but distinct from — consolidation.
Soft credit inquiry
When a lender checks your credit history without an official credit inquiry (also known as a “hard” credit pull).
Soft credit inquiries don’t hurt your credit score and allow you to check your interest rates and loan terms from a lender.
Standard repayment plan
A 10-year term for federal student loans.
Over the 10-year standard repayment period, the borrower makes 120 equal student loan payments to pay off their loans. Private lenders have their own repayment term lengths.
A student loan on which the government pays all interest charges during periods of deferment.
This includes while the borrower is in school, during the six-month grace period after graduation, and during any subsequent deferments. Subsidized loans are forms of federal Direct loans.
A federal Direct loan made to undergraduate and graduate students that accrues interest at all times.
This includes while the borrower is in school or the loan is on a qualifying deferment.
An interest rate that can fluctuate over time.
Most variable rate loans adjust at specified time intervals (such as once per year) and come with interest rates based on a certain benchmark, such as LIBOR or the Prime Rate.
The more you know…
By understanding the student loan terms on this list, you’ll you be better-equipped to understand your student loans. You’ll also be able to make smarter decisions when it comes to financing your education and saving money on repayment.
This information might seem trivial now, but it can help you avoid big mistakes in the future. Like not being eligible for the PSLF programbecause of your repayment plan—a common problem.
The same goes for other terms on this list. It definitely pays to be an informed borrower.
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