The Student Loan Glossary: Terms To Know Before You Take Out a Loan
Taking out a student loan is complicated. But it can affect your financial life for decades after you graduate—so it’s important to know what you’re signing up for. Many students fully realize the extent of their loan’s terms and requirements only after they graduate and are hit with the bill.
Here are a few loan terms you should know going in to avoid that scenario.
Accrual: To accrue is to add up or accumulate—and that’s what your interest does when you don’t pay it. This may be because your loan is deferred, either because of financial hardship or because you’re in school. Unless you have a subsidized loan, it’s best to pay down the interest to keep it from accruing.
This is the amount of money still owed on the loan, including both principal and interest.
If you don’t pay your interest, it is capitalized—or added to the balance of your loan.
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When you consolidate your loans, you combine multiple loans into one loan to make repayment easier—and lock in a lower interest rate. With student loans, this can usually only be done with federal loans.
This is a period of time in which payments are not required. If you have an unsubsidized loan, the interest will continue to accrue during this time. If your loan is subsidized, it won’t.
Federal student loan:
A federal loan is a loan given by the government, sometimes through a school or lender. These loans have lower interest rates and more beneficial terms than private loans.
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Fixed interest rate:
Fixed interest rates are rates that don’t change. Most federal student loans offer fixed interest rates, while most private loans have variable interest rates.
This is a period of time in which payments are not required. It is usually granted in instances of hardship when you have not qualified for a deferment. The difference is that forbearances are usually for a shorter time period, and interest does accrue, both on subsidized and unsubsidized loans.
This is a periodic fee charged on top of your principal every month. The amount of interest you pay is usually disclosed as a percentage of your balance.
This occurs when the payments you make on the loan are less than the interest due—so the remaining interest is added to your balance. In this way, the balance of your loan can inflate even while you’re making payments.
A Perkins loan is the most desirable type of federal loan. It’s always subsidized, with the lowest interest rates available. It is, however, available only on a limited basis to students with financial need.
This is a federal loan available to both parents and students. It is always unsubsidized; however, it is still usually a better deal than private loans.
Principal. This is the original amount of money borrowed to pay tuition at a traditional or accredited online school, without interest or fees.
Private student loan:
A private student loan is given out by a bank, not the government. These loans have higher interest rates than federal loans, and most have variable interest rates as well.
A Stafford loan is a federal loan that can be either subsidized or unsubsidized. Anyone can take out an unsubsidized Stafford loan, but the subsidized version is available only to those who demonstrate financial need.
The government pays the interest on your loan while you’re in school or have an economic hardship deferment—so it doesn’t accrue on your balance.
With this loan, the interest continues to add up while it’s deferred—whether because you’re in school or because of economic hardship.
Variable interest rate:
This is an interest rate that changes, usually based on an underlying index or benchmark interest rate.
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- Questions You Should Ask Before Applying for Student Loan Forbearance
- The Bank on Students Act: What It Is, and How It Could Help Student Borrowers
- How the Death of a Co-Signer Can Affect Your Student Loan
- Peer-to-Peer Student Loans: What They Are, and How They Can Help You Pay for College
- If You're Unable to Work Because of a Disability: What Happens to Your Student Loan?
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