millennial in debt

Since I’m an actual real teacher I thought it was absolutely necessary to help bring you up to speed when it comes to student loan terms you need to know. The biggest issue (well one of them) when it comes to student loans, is misinformation/lack of knowledge. I’ve heard countless of times: “if I had only known” or “how come no one told me”. The sad part is the loan companies put the information out there, but don’t really do a great job of informing people what all the terminology really means. So boom! That’s what I’m doing for you and I’m differentiating (check me out with my Master’s Degree in Education – that I’m still paying for).

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Below I’ve got a quick rundown on the student loan terms you need to know. If you want more detail or more information below the video I break down it down even further for you. You’re welcome!

Student Loan Terms You Need To Know

student loan terms you need to know

A

APR/Annual Percentage Rate: You’ve probably heard this term before if you have a credit card or two. This is the interest rate you pay on your own on a yearly basis (yes interest rates can change over time).

Accredited: If you are apply for federal loans (through FAFSA) you want to make sure the school you are attending or will be attending is accredited. This means that the US DOE will allow use of federal loans because the school has met certain requirements. If you are not attending an accredited school you will have to rely on private loans.

B

Borrower: This is the person who is legally responsible for the student loans (that my friends… would be you) Unless you have a Parent PLUS loan you are the borrower on your loan. If you do have a Parent PLUS loan your parents are the borrowers of the loan.

C

Cancellation: Get hype, but don’t get too hype. Cancellation of loans doesn’t occur often but it does happen under certain circumstances. Different types of cancellation/ for different reasons will breed different results. Some may affect your credit score, and cause you to pay taxes on the amount that has been cancelled. Other circumstances (if you are disabled or die) will have a different outcome.

Consolidation:  If you have several different loans from different companies, or more than one loan payment, consolidation will help you bring all those loans under one roof essentially. All of your loans will be combined, which usually results in a smaller monthly payment, but does extend the life of your loan.

Compound Interest: Student loans operate on a compound interest protocol. This means that interest is added to your principle on a daily basis. They take the amount of loans you have, multiply it by the interest rate and add that amount every day. This is why you will often be making monthly payments and see your balance is unchanged,

Capitalization: Similar to compound interest, capitalization occurs when you start repaying your loans. All of the unpaid interest is added to the principle balance of your loan.

D

Debt-to-Income-Ratio: I learned about this a few years ago when I was trying to get a mortgage (lol silly me). The real estate agent explained to me that even though I had stellar credit, my debt to income ratio was too high to get a good deal/ approved for a large mortgage. A high debt to income ration can also negatively affect your credit report. This is a standard item lenders will look at to determine whether you’ll be eligible for a loan. If you have a lot of student loan debt, you may not be eligible for other types of loans and credit, including credit cards, a car loan, or a mortgage loan.

Default: This means you have not made payments on your loan. The loan companies give you 270 days before they mark your loan as being in default. When your loans go into default, your credit takes a hit and you lose the ability to apply for forbearance or deferment.

Delinquency: This is a little different from being in default. If you are delinquent it means you have missed a schedule payment. Your loan will go to the credit bureau after three months of non payment.

Deferment: A deferment is a set period of time during which repayment of your student loans is put on hold. Your credit doesn’t decrease, but it will show up that your loan is in deferment. The government takes care of the interest of your loans as you are in deferment so that will not continue to accrue. Applying for deferment is a process and it is not easily granted. You must meet very specific criteria.

F

FAFSA: FAFSA is the Free Application for Federal Student Aid. This application which you can fill out as early as January 1st is the only way for you to obtain federal loans.

Federal Loan: A federal loan is one that comes directly from the U.S. Department of Education (subsidized and unsubsidized direct loans)

Forgiveness: Usually only applicable to federal loans if you meet certain criteria. For example I’m a teacher in the city, and will be receiving loan forgiveness on my federal loans in 2020. This is because I made 120 payments (or will by that time) and worked as a teacher for 10 years in the city. When the loan is forgiven it is essentially erased and I am no longer responsible for paying it back.

Forbearance: . A forbearance allows you to stop making payments for 12 months (deferment is only for 6 months maximum) This will likely extend the life of your loan and interest will continue to accrue even though you are not responsible for making payments at the time.

G

Grace Period: Most lenders offer a grace period, a certain amount of time after you graduate or stop attending college full-time, when you do not yet have to make payments on your student loans (this is usually 6 months so November is always a little tough for college grads) .

I

Income Based Repayment: Many new college grads will be put on an income based repayment plan because it gives you a lower monthly payment without having to consolidate or refinance. This option is only available for federal loans, and you must submit your W2 or pay stubs in order to be approved for the program. The amount you pay will be based off of your income. The payments can increase over time as you make more money. You must re-appy/ re-verify every year.

Interest Rate: You must pay interest to your lender in exchange for borrowing the money. The dollar amount of interest owed is calculated using a percentage of the debt — for example, 6.25% —  your interest rate. A fixed interest rate will not go up or down during the term of the loan, whereas variable interest rates can shift depending on financial markets.

P

Pay As You Earn: This is a federal loan option and is similar to the income driven repayment plan, The major difference is the percentage of your discretionary income that they use. Income based repayment caps at 15% while the pay as you earn option caps at 10% of your income.

Perkins Loan: This was one of the first loans  I ever paid off because it was so small. This loan differs from the others because it comes directly from your school. You still must apply for it through the FAFSA app as it is a federal loan. It has lower interest rates and is given based off of need and what your school has available.

Principal: This is the money that you actually borrowed without the interest.

Private Loan: This is the worst type of loan and is what I have fought so hard to get rid of. They do not go away when you file for bankruptcy, they can still come after your loved ones for repayment after you pass away, and there are no government funded assisted programs for them like the income repayment plan. To make matters worse their interest rates can become astronomical (my highest one was 13%) Private loans usually come from a bank or another company like Sallie Mae or Navient.

Promissory Note: This is what you will sign to agree to the terms of your student loan payback.

S

Subsidized: The federal government will pay interest that accrues during your grace period,.

U

Unsubsidized: You are responsible for your interest on loans during all periods.

W

Wage Garnishment:  Remember I told you not to go into default a few letters back right. Well messed up credit isn’t the only repercussion. The government can garnish your check to get their due. If your federal student loans go into default, the federal government has the ability to take up to 15% of your disposable income directly from your paycheck. Yikes

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Hey there! I’m Melissa, co-founder of Trials n Tresses, natural hair and beauty lover, binge tv watcher and lover of life. When I am not creating content for TNT, I’m busy teaching the future of society.