Student Loan Definitions Every Borrower Must Know

Whether you’re looking for the best way to pay for college or tackling school debt, you'll better understand your options if you understand the terms you encounter. This glossary offers definitions of key student loan terms and points you to resources that help you make smart choices.

Accreditation: The status a school gets when it meets standards set by a national or regional agency that is recognized by the U.S. Department of Education. If your school isn’t accredited, you won’t qualify for federal loans and grants.

Annual percentage rate (APR): The cost of your student loan, including interest and any fees, expressed as a percentage of your yearly expense. Comparing APR instead of interest rates will give you a more accurate picture of the real cost of a loan.

Autopay: A payment option that allows your student loan servicer to automatically debit your monthly payment from your bank account. If you enroll in autopay, you will likely receive an interest rate discount (usually 0.25% or more) and won’t have to worry about accidentally missing a payment.

Borrower defense to repayment: A federal student loan forgiveness program for borrowers whose schools violated certain laws, or defrauded or misled students. Borrowers can also get relief if their school closed before they could complete a degree. New rules for eligibility and forgiveness amounts make successful borrower defense to repayment claims more difficult, but you should still make a claim if you believe you’ve been defrauded.

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Capitalization: A process that adds unpaid interest to the principal balance of your loan, increasing the amount on which you pay interest going forward. Capitalization generally happens after periods of authorized nonpayment, like deferment and the grace period. You can avoid capitalization by paying at least the interest on your loan each month.

Consolidation: A process that combines multiple federal student loans into one federal loan through the Department of Education. Consolidation won’t lower your interest rate, but may be necessary for some federal loan repayment programs.

Co-signer: A person who applies for a loan with the student and is legally liable for the loan if the student can’t pay. Federal loans typically don’t require co-signers. Though private student loans are available without a co-signer, most students don’t have the credit history needed to qualify.

Cost of attendance (COA) is your estimated annual school cost, including tuition and fees, books and supplies, room and board, transportation and personal expenses. Colleges subtract your Student Aid Index, or SAI, from their cost of attendance to calculate the maximum amount of need-based aid you can receive. Student Aid Index is a measure of what the federal government estimates your family can pay for college.

Default: The point at which collections efforts for missed payments may begin. Federal student loans default after 270 days, and private student loans typically default after 120 days of delinquency. Depending on the loan, creditors can sue, garnish wages or seize tax refunds. Loan servicers typically will work with you to get your loan back in good standing.

Deferment: A period of authorized nonpayment that pauses student loan payments for up to three years. Deferment can be a good option if you have a federal subsidized and can’t afford to make payments now, but will be able to soon. If you need a longer-term fix, consider income-driven repayment instead.

Delinquent: The status of a student loan after one or more missed payment. Loans enter default after a prolonged period of delinquency. While you will probably face late fees, you can avoid credit damage and default by quickly paying the past-due amount.

Dependent (and independent): Student status that determines if parent information is needed on the FAFSA. If you’re a dependent student, you report your information and your parents’ information. If you’re an independent student, you report your information and your spouse's information (if you have one). Your status is based on your answers to the dependency questionnaire on the FAFSA.

Direct loan: Loans from the federal government to the student. There are two types of direct loans: subsidized and unsubsidized. Generally, federal student loans are more flexible than private loans, so students should seek them first.

Discretionary income: The amount of money left over from your paycheck after paying taxes and necessary expenses like food and shelter. The Education Department uses discretionary income to determine payments for income-driven repayment plans.

Student aid index: (Formerly known as expected family contribution, or EFC). An estimate from the federal government of how much money your family can afford to pay toward your college education. Schools subtract your Student aid index from their cost of attendance to calculate the maximum amount of need-based aid you can receive.

Financial aid: Money to help students pay for college in the form of grants, scholarships, work-study or loans. Financial aid can come from the government, school or private organizations. Students should request federal financial aid by completing the FAFSA.

Financial aid award letter: Each school that accepts you will send a letter that explains how much financial aid you will receive. Financial aid award letters will vary from school to school, making comparisons of aid offers difficult. Aid awards can be appealed.

Fixed interest: An interest rate that does not change during the life of a loan. All federal student loans have fixed interest rates, but private loans can offer fixed or variable interest rates. Fixed interest is the safer option because you don’t have to worry about your rate — and payment — increasing.

Forbearance: A period of authorized nonpayment for up to 12 months at a time. Interest accrues on all loans in forbearance, so it’s usually not a good option unless you can’t pay your loans and don’t qualify for deferment. An income-driven repayment plan is a better option if you won’t be able to make your payments for an extended period.

Free Application for Federal Student Aid (FAFSA): The form that the federal government, states, colleges and other organizations use to determine EFC (expected family contribution) and award financial aid. Completing the FAFSA should be your first step in college finance planning and is necessary to obtain many grants, scholarships, work-study programs and federal student loans.

FSA ID: The username and password you (and your parents) use to log into federal student aid services, like the FAFSA. You will also use your FSA ID to sign any promissory notes on federal student loans and signal the completion of your entrance and exit counselings.

Gap year: A yearlong sabbatical before starting college or graduate school, or before entering the workforce. A gap year can lead to greater academic success, but stopping out — taking a break in the middle of your studies — can have unintended financial effects.

Grace period: A period of authorized nonpayment that generally lasts six months after you’ve graduated, left school or dropped below half-time enrollment. All federal student loans qualify for a grace period, but private lenders may not offer them. You can make payments during the grace period to start paying down the loan and to avoid interest capitalization.

Institutional loan: A loan which is offered directly by a college. With an institutional loan, there are very few standards for features of the loan, such as borrower requirements, interest rates, terms and repayment flexibility. Because of this, it is important to consider all features of an institutional loan before accepting it.

Interest: The cost of borrowing money for school, not including any fees. Most student loans calculate interest using the simple daily interest formula.

Net price calculator: Tool that calculates the college’s total cost — including tuition, room and board and books — minus any grants and scholarships that the student is eligible for. All colleges that offer federal financial aid must have an online net price calculator to help students and parents considering out-of-pocket costs.

Origination fee: The fee a borrower pays to offset a lender’s cost for issuing a student loan. All federal student loans have origination fees, while many private student loans don’t. Origination fees typically have a minimal effect on undergraduates with lower loan amounts, but can be costly for graduates and those with higher loan totals.

PLUS loan: Federal student loans for parents and graduate and professional students. PLUS loans can have higher interest rates and fees than some private student loans, but have less strict credit standards.

Preferred lender list: A list of private lenders a college provides to its students. The list is intended to simplify the process of looking for a private student loan by giving students a list of lenders who have met a set of criteria established by the college. A preferred lender list can be a good place to start looking for a loan, but students can also choose lenders who aren't on that list.

Private student loan: Education funding from banks, credit unions and online lenders instead of the federal government. Private loans are best used to fill funding gaps after maxing out federal loans.

Refinance: The process of swapping out your current student loans for a new private loan with more favorable terms, like a lower interest rate. Refinancing can help save you money on your loan and can be right for people with stable finances.

Rehabilitation: A program that gets federal student loans out of default. Rehabilitation removes the default from your credit report and eliminates additional collection costs, but you can rehabilitate a defaulted loan only once.

Simple interest: A method of calculating interest charges that is based on the principal balance only. Loans that use the simple daily interest formula are cheaper than loans that use a compounding formula, because they don’t charge interest on interest.

Stopout: A break from college during an academic program. A stopout differs from a gap year, which typically is taken between academic studies, such as between high school and college. Stopping out breaks up the momentum of your degree program and could cause you to have to make payments on your student loans. This term can also refer to a person who takes this type of break.

Student aid report: Summary of your FAFSA application that includes your Expected Family Contribution (EFC) and four-digit data release number. If the EFC on your student aid report doesn’t match your current financial situation, talk to the financial aid office at the school you plan to attend.

A student loan is money you borrow from the federal government or a private lender to help pay for college costs, like tuition, supplies, books and living expenses. Federal student loans typically have lower interest rates and more flexible repayment options than private loans. Borrowers should exhaust student loans from the federal government before applying with private lenders.

Student loan servicer: The private company that manages your federal student loan payments until they are repaid. Student loan servicers might not always offer the best repayment options, so it’s important to ask questions and advocate for yourself.

Subsidized loan: A federal student loan that doesn’t accrue interest while you’re in college or during other periods of authorized non-repayment, such as a grace period. Subsidized loans don’t require credit history or a co-signer. They are a part of financial aid and only undergraduate students with demonstrated financial need are eligible. Use these loans first if you can.

Unsubsidized loan: A federal student loan that starts to accrue interest as soon as it is disbursed. Undergraduate, graduate and professional students are eligible for unsubsidized loans, which don’t require credit history or a co-signer. Because interest costs on unsubsidized loans are higher, eligible students should take out subsidized loans first.

Variable interest: Variable interest rates can change monthly or quarterly depending on the loan contract and come with rates caps as high as 25%. Variable interest loans are riskier than fixed interest loans but can save you money if the timing is right.