There are so many upsides to investing in your education—the personal enrichment and possibility of a bright and fruitful future being the most obvious. But, there are also some potential downsides that are hard to ignore, one of the main ones—if you’re like so many others—being the debt you may accrue.
If you’re a student loan borrower, you’ve probably noticed that your loans have a language all their own— a sometimes complicated language full of words and phrases that often have more than one meaning.
Getting a grasp on all these terms can have big benefits, like potentially saving you money and helping you make more informed, confident decisions. Unfortunately, memorizing loan vocabulary sounds like about as much fun as watching paint dry.
Instead of enrolling in Student Loan Language 101, you can use our quick and dirty reference guide to find some answers without information overload. We break down important words and phrases, tell you what it all means (in plain English, no less) and even explain why you should care. Think of it as crib notes for getting a better grade on your loans.
Borrowing a loan can have long-term financial consequences, so it’s important to fully understand the fees and interest rates that will affect the amount of money you owe. Here are a few of the most important terms to understand before you take out a student loan:
Common Student Loan Terminology
Principal is the original loan amount you borrowed. For example, if take out one $100,000 loan for grad school, that loan’s principal is $100,000.
The expected amount of time the loan will be in repayment. Generally speaking, a longer term will mean lower monthly payments but higher interest over the life of the loan, while a shorter term will mean the opposite. Loan terms vary by lender, and if you have a federal loan, you are usually able to select your student loan repayment plan.
A contract that says you’ll repay a loan under certain agreed-upon terms. This document legally controls your borrowing arrangement, so read your promissory note carefully. If you don’t fully understand the agreement, contact your lender before you sign.
A fee that some lenders charge for processing the loan application, or in lieu of upfront interest. To minimize incremental costs on your loan, look for lenders that offer no or low fees.
The amount of interest that has accumulated on a loan since your last payment. You can keep accrued interest in check by making your payments on time each month. However, after a period of missed or reduced payments, accrued interest may be capitalized, which essentially means you’d have to pay interest on the student loan accrued interest.
Amortization refers to the amount of loan principal and interest you pay off incrementally over your loan term. Each student loan payment is a fixed amount that contributes to both interest and principal. Early in the life of the loan, the majority of each payment goes toward interest. But over time as you pay down your loan balance, the ratio shifts and most of the payment goes toward the principal.
Annual Percentage Rate (APR)
The annual rate that is charged for borrowing, expressed as an annual percentage. APR is a standardized calculation that allows you to make a more fair comparison of different loans. Generally speaking, the lower your APR, the less you’ll spend on interest over the life of the loan.
A third party, such as a parent, who contractually agrees to accept equal responsibility in repaying your loan(s). A student loan cosigner can be valuable if your credit score or financial history are not sufficient enough to allow you to borrow on your own.
With a cosigner, you are still responsible for paying back the loan, but the cosigner must step in if you are unable to make payments. A co-borrower applies for the loan with you and is equally responsible for paying back the loan according to the loan terms on a month-to-month basis.
A period of time after you graduate, leave school or drop below half-time during which you’re not required to make payments on certain loans. Some loans continue to accumulate interest during the grace period, and that interest is typically capitalized, making your loan more expensive.
A company your lender may partner with to administer your loan and collect payments. For questions about your student loan payments or administrative details such as account information, you should contact your student loan servicer.
London Interbank Offered Rate (LIBOR)
An interest rate benchmark commonly used by banks and other lenders to set interest rates for loans. Many variable student loans are tied to LIBOR, which means that your loan’s APR will rise or fall based on the movement of the index. Rates are typically adjusted on a monthly basis.
The Potential Student Loan Pitfalls
Once you understand loan basics and have secured your student loans, there are a few more terms to know. Making sure you understand your repayment terms and options like deferment or forbearance will allow you to find the best strategy to pay off your student loans quickly.
Failure to repay a loan according to the terms agreed to in the promissory note. Defaulting on your student loans can have serious consequences, such as additional fees, wage garnishment, and a significant negative impact on your credit. It’s always better to talk to your lender about potential hardship repayment options, such as deferment or forbearance, before defaulting on a loan.
The temporary postponement of loan repayment, during which time you may not be responsible for paying interest that accrues (on certain types of loans). Student loan deferment can be useful if you think you’ll be in a better place to pay your loans at a later date. However, deferment is usually only available for certain federal loans. To potentially cut down on interest, it may be wise to weigh your deferment options.
The temporary postponement of loan repayment, during which time interest typically continues to accrue on all types of federal student loans. If your student loan is in forbearance you can either pay off the interest as it accrues, or you can allow the interest to accrue and it will be capitalized at the end of your forbearance.
Use forbearance wisely, because interest that accrues during the forbearance period typically capitalized making your loan more expensive. If you can afford to make even small payments during forbearance, it can help keep interest costs down.
You will usually have to apply for student loan forbearance with your loan holder and will sometimes be required to provide documentation proving you meet the criteria for forbearance. For a loan to be eligible for forbearance, there must be some unexpected temporary financial difficulty.
Accrued interest that is added to your loan’s principal balance, typically after a period of non-payment such as forbearance. When the interest is tacked onto your principal balance, your interest is now calculated on that new amount.
Every time interest is capitalized on your loan, your principal goes up. Since interest is charged as a percent of your principal, the more often your loan is capitalized, the more interest you’ll pay over time.
Most student loans begin accruing interest as soon as you borrow them. While you are often not responsible for repaying your student loans while you are in school or during a grace period or forbearance, interest will still accrue during these periods. At the end of said period, the interest is then capitalized, or added to the principal of the loan.
When interest is capitalized, it increases your loan’s principal. Since interest is charged as a percent of principal, the more often interest is capitalized, the more total interest you’ll pay. This is a good reason to use forbearance only in emergency situations, and end the forbearance period as quickly as possible.
Consolidation (through the Direct Loan Consolidation Program)
The act of combining two or more loans into one loan with a single interest rate and term. The resulting interest rate is a weighted average of the original loan rates—rounded up to the nearest eighth of a percentage point.
Only certain federal loans are eligible for the Direct Consolidation Program. Consolidating can make your life simpler with one monthly bill, but it may not actually save you any money. You may be able to reduce your monthly payments by increasing the loan term, but this means you’ll pay more interest over the life of the loan.
Consolidation (through a private lender)
The act of combining two or more loans into one single loan with a single interest rate and term. When you consolidate loans with a private lender, you do so through the act of refinancing, so you’re given a new (hopefully lower) interest rate or lower payments with a longer-term.
Most private lenders only refinance private loans, but SoFi refinances both private and federal loans. By refinancing, you may be able to lower your monthly payments or shorten your payment term.
The Potential Money-Savers
Building a repayment plan and sticking to it is one of the best ways to repay your student loans quickly while spending the least amount of money on interest. Now that you understand what could cause your interest to skyrocket, here are a few terms that could help you reduce the money you spend over the life of your loans.
Student Loan Refinancing
Taking out a new loan at a lower interest rate and using it to pay off your original loan(s), potentially lowers your overall interest rate.
Your new, refinanced loan will be a private loan, and you can refinance your federal or private student loans (or both). The benefits of student loan refinancing can include lower monthly payments or a shorter payment term and could save you interest over the life of the loan.
To see how refinancing could help alleviate some financial burden, take a look at SoFi’s Student Loan Refinance Calculator. When you refinance with SoFi, there are no origination fees, application fees, or prepayment penalties.
Automated Clearing House (ACH)
An electronic funds transfer is sent through the Automated Clearing House system. The ACH is an electronic funds—transfer system that helps your loan payment transfer directly from your bank account to your lender or loan servicer each month.
The benefits of ACH are two-fold—not only can automatic payments keep you from forgetting to pay your bill, but many lenders also offer interest rate discounts for enrolling in an ACH program.
Paying off the loan early or making more than the minimum payment. All education loans, including private and federal loans, allow for penalty-free prepayment, which means you can pay more than the monthly minimum or make extra payments without incurring a fee. The faster you pay off your loan, the less you’ll spend on interest.
Whether you need help paying for school or help paying off the loans you already have, SoFi offers competitive interest rates and great member benefits as well.
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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.