Student loan definitions: 14 terms to know before repaying debt
These common student loan repayment terms are must-know for borrowers. (iStock)
Federal student loans and private student loans can both help when it comes to paying for college. But, of course, you'll have to repay the loans at some point. And you'll likely need to evaluate loan programs, establish a repayment schedule and more to pay off loan debt.
Getting to know some of the most common student loan definitions can make the process easier. The better you understand how student loan repayment works, the more money you could potentially save by cutting the total cost. Here are 14 student loan terms to know.
Student loan servicer
Interest rate and annual percentage rate (APR)
Capitalization
Grace period
Student loan refinancing
Credit score and credit history
Debt-to-income ratio
Cosigner
Consolidation
Student loan forgiveness
Income-driven repayment
Deferment
Forbearance
Delinquency and default
Read on to fully understand the meaning of these terms — and how they pertain to you.
1. Student loan servicer
If you have federal student loans, you'll need to know who your student loan servicer is.
The Department of Education assigns federal student loans to a student loan servicer after they're disbursed. This is who you'll make your monthly student loan payments to and receive monthly statements from.
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2. Interest rate and annual percentage rate (APR)
Interest rate and APR are key student loan repayment terms to know because they relate to your cost of borrowing.
The interest rate is the cost of borrowing the principal amount. The APR reflects the annualized cost of borrowing when the interest rate and any loan fees the lender charges are added in.
To learn more about interest rates and APR, visit Credible. Using Creidble's free online tools, you can compare variable interest rates from 1.24% and fixed interest rates from 3.53% APR.
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3. Capitalization
Capitalization is when unpaid interest is added to your federal student loan principal during periods when you're responsible for paying it. When interest is capitalized, the outstanding principal amount due increases.
4. Grace period
A grace period is a temporary period in which you aren't required to make payments on your student loans. With federal student loans, you typically have a six-month grace period after you graduate, leave school, or drop below half-time enrollment. Private student loans can also have a grace period, though private student loan lenders aren't required to offer one.
See what private loan lenders are offering now via Credible.
5. Student loan refinancing
Refinancing student loans means taking out a new loan, ideally at a lower interest rate, to pay off existing loans.
If you have private student loans you may decide to refinance to lower your rate and monthly payments. Or if you have private loans with a variable interest rate, you may want to refinance to a fixed-rate and vice versa.
If you're considering student loan refinancing, it's helpful to compare rates across multiple lenders. You can easily do so using this online tool without affecting your credit scores.
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6. Credit score and credit history
Your credit score is a three-digit number that tells lenders how responsible you are when managing money. A credit score is based on credit history and credit reports, including:
Payment history
Credit utilization
Credit age
Types of credit used
Inquiries for new credit
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7. Debt-to-income ratio
Debt-to-income ratio means the amount of your monthly income that goes toward student debt. Private student loan lenders will consider this when applying for new loans or student loan refinancing.
Basically, the less student debt you have the better. If you want to increase your odds of being approved for student loan refinancing, then you'll want to improve your debt-to-income ratio by paying off debt and/or increasing your income. Plug some simple personal information into Credible's online forms to determine where you stand when it comes to a student loan refinance.
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8. Cosigner
A cosigner is someone who agrees to borrow student loans with you and be legally responsible for them.
A cosigner may be necessary for private student loans because unlike federal student loans, a credit check is typically required. If you have a limited credit history or a low credit score, a cosigner with good credit could increase your approval odds or help you lock in a lower interest rate.
You can easily add a cosigner to your loan application via Credible. With Credible, you can even compare multiple cosigners to see which one gets you the best loan rates and terms.
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9. Consolidation
Consolidation allows you to streamline student loan repayment by combining multiple federal student loans into one.
That sounds similar to student loan refinancing but there's one key difference: consolidation doesn't reduce your interest rate. It can, however, leave you with just one student loan payment to make each month instead of several.
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10. Student loan forgiveness
Student loan forgiveness means that a portion of your loan balance is forgiven, contingent on meeting certain conditions.
Public Service Loan Forgiveness may be an option if you have a federal loan and you're pursuing a career in public service. To qualify, you have to make 120 qualifying payments on your loans, work for a qualifying employer and be enrolled in an income-driven repayment plan.
11. Income-driven repayment
When you borrow a federal loan, you have the option to choose between several repayment plans, including income-driven repayment.
With income-driven repayment options, your monthly payments are based on your household size and discretionary income. These plans can give you more time to pay off your loans and potentially lower your monthly payment but you could end up paying more interest total over the life of the loan.
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12. Deferment
Deferment allows you to temporarily pause payments to your federal student loans. During this time, no interest accrues on your loans and no payment is due.
STUDENT LOAN DEFERMENT VS. FORBEARANCE: WHAT'S THE DIFFERENCE?
13. Forbearance
Forbearance and deferment are similar student loan repayment terms. Taking a forbearance also allows you to pause payments temporarily.
The difference is that interest can still accrue on your loans, meaning that when you resume repayment, your loan balance may be higher.
14. Delinquency and default
Delinquency means that you've fallen behind on making payments to federal or private student loans. Being in default means you've gone without making payments for an extended period of time.
If you default on federal student loans, you may be able to remedy the situation through student loan rehabilitation. With private student loans, you'll have to connect with private lenders to see what options are available.
Keep in mind that with either type of loan, delinquency and default can negatively affect your credit score. That could make student loan refinancing more challenging.