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. Getting a grasp on terms like interest rate vs. APR, subsidized vs. unsubsidized loans, and fixed vs. variable interest rates can help you make more informed, confident decisions.
Instead of enrolling in Student Loan Language 101, you can use our quick and dirty reference guide to find some answers without information overload. 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
An academic year is one complete school year at the same school. If you transfer, it is considered two half-years at different schools.
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.
Adjusted Gross Income (AGI)
AGI is an individual’s gross income, less any deductions or adjustments to income. This includes things like wages, salaries, any interest or dividends you may earn and any other sources of income. You can find your AGI on your federal income tax returns.
Aggregate Loan Limit
The aggregate loan limit is the maximum amount of federal student loan debt a borrower can have when graduating from school. The aggregate loan limit may vary depending on whether you are a dependent or independent student.
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. Consider the difference between interest vs. APR — APR reflects the cost of any fees charged on the loan, in addition to the basic interest rate. Generally speaking, the lower your APR, the less you’ll spend on interest over the life of the loan.
Annual Loan Limit
The yearly borrowing limit set for federal student loans.
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.
An award letter is sent from your school and details the types and amounts of financial aid you are eligible to receive. This will include information on grants, scholarships, federal student loans, and work-study. You will receive an award letter for each year you are in-school and apply for financial aid.
The academic year that financial aid is applied to.
The borrower is the person who took out a loan. In doing so, they agreed to repay the loan.
Some financial aid programs are administered by specific financial institutions, such as the Federal Work-Study program. Generally, schools receive a certain amount of campus-based aid annually from the federal government. The schools are then able to award these funds to students who demonstrate financial need.
This refers to the cancellation of a borrower’s requirement to repay all or a portion of their student loans. Loan forgiveness and discharge are two other types of loan cancellation.
Capitalization is when unpaid interest is added to the principal value of the student loan. This generally occurs after a period of non-payment such as forbearance. Moving forward, the interest will be calculated based on this new amount.
Accrued interest 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.
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.
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.
Recommended: Do I Need a Student Loan Cosigner?
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.
Recommended: What Is a Direct Consolidation Loan?
Cost of Attendance
Cost of attendance is the estimated total cost for attending a college based on the cost of tuition, room and board, books, supplies, transportation, loan fees, and miscellaneous expenses. Schools are required to publish the cost of attendance.
Recommended: What Is the Cost of Attendance in College?
Credit reports detail an individual’s bill payment history, loans, and other financial information. These reports are used by lenders to evaluate your creditworthiness.
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.
When you miss a student loan payment, the loan becomes delinquent. The loan will be considered delinquent until a payment is made on the loan. If the loan remains in delinquency for a specified period of time (which may vary for federal vs. private student loans), it may enter default.
The Direct Loan program is administered via the U.S. Department of Education. There are four main types of direct loans including Direct Subsidized loans, Direct Unsubsidized loans, Direct PLUS loans, and Direct Consolidation loans.
Direct PLUS Loan
Direct PLUS loans are types of federal loans that are made to graduate or professional student borrowers or to the parents of undergraduate students. Direct PLUS Loans made to parents may be referred to as Parent PLUS Loans.
When funds for a loan are paid out by the lender.
Student loan discharge occurs when you are no longer required to make payments on your loans. Typically, student loan discharge occurs when there are extenuating circumstances such as the borrower has experienced a total and permanent disability or the school at which you received your loans has closed.
Discretionary income is the money remaining after you pay for necessary expenses. An individual’s discretionary income is used to help determine their loan payments on an income-driven repayment plan.
An endorser is similar to a co-borrower in that they also sign on to the loan agreement and are responsible for repaying the loan if the primary borrower is unable to do so. Individuals who may not qualify for a Direct PLUS Loan on their own can add an endorser to their application.
Determined by the school you attend, your enrollment status is a reflection of your enrollment at the school. Enrollment status includes, full-time, half-time, withdrawn, and graduated.
Expected Family Contribution (EFC)
An estimation of the amount of money a student and their family is expected to pay out of pocket toward tuition and other college expenses.
A type of financial aid, students who demonstrate financial aid may qualify for the federal work-study program, where they work part-time to earn funds to help pay for college expenses.
Funds to help pay for college. Financial aid includes grants, scholarships, work-study, and federal student loans.
Financial Aid Package
An overview of the types of financial aid you are eligible to receive for college. Financial aid packages provide information on all types of federal financial aid and college-specific aid such as scholarships, grants, work-study, and federal student loans.
Some types of financial aid are determined by financial need. Financial need is defined as the difference between the cost of attendance at your school and the expected family contribution of your school.
Fixed Interest Rate
An interest rate that remains the same for the life of the loan. The interest rate does not fluctuate.
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.
Loan forgiveness is another situation in which you are no longer responsible for repaying all or a portion of your student loans. Public Services Loan Forgiveness and Teacher Loan Forgiveness are two types of loan forgiveness programs in which your loans are forgiven after meeting specific requirements, such as working in a qualifying job and making qualifying loan payments.
In August 2022, President Biden announced a loan forgiveness plan for borrowers with student loan debt. Under this plan, borrowers earning up to $125,000 (when filing taxes as single) may qualify for up to $10,000 in student loan forgiveness. He also announced that Pell Grant recipients may qualify to have up to $20,000 of their loans forgiven.
Free Application for Federal Student Aid (FAFSA®)
This is the application students use to apply for all types of federal student aid, including federal loans, work-study, grants, and scholarships. The FAFSA must be completed for each year a student wishes to apply for financial aid.
Recommended: FAFSA Guide
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.
Grad PLUS Loans
Another term to refer to a Direct PLUS loan, specifically one borrowed by a graduate or professional student.
Graduate or Professional Student
A student who is pursuing educational opportunities beyond a bachelor’s degree. Graduate and professional programs include master’s and doctoral programs.
Graduated Repayment Plan
A type of repayment plan available for federal student loan borrowers. On this repayment plan, loan payments begin low and increase every two years. This plan may make sense for borrowers who expect their income to increase over time.
A type of financial aid that does not need to be repaid. Grants are often awarded based on financial need.
Students who are enrolled at least half-time in school are eligible to defer their federal student loans. This type of deferment is generally automatic for federal student loans. Note that unless you have a subsidized student loan, interest will continue to accrue during in-school deferment.
Interest is the cost of borrowing money. It is money paid to the lender and is calculated as a percentage of the unpaid principal.
A tax deduction that allows you to deduct the student loan interest you paid on a qualified student loan for the tax year. Interest paid on both private and federal student loans qualifies for the student loan interest deduction.
The financial institution that lends funds to an individual borrower.
A loan period is the academic year for which a student loan is requested.
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.
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.
Students who are enrolled in school less than full-time are generally considered part-time students. The number of credit hours required for part-time enrollment are determined by your school.
A grant awarded by the federal government to undergraduate students who demonstrate exceptional financial need.
Perkins Loans were a type of federal loan available to undergraduate and graduate students who demonstrated exceptional financial need. The Perkins Loan program ended in 2017.
Another way to describe Direct PLUS Loans, which are federal loans available for graduate and professional students or the parents of undergraduate students.
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.
This is the interest rate that commercial banks charge their most creditworthy customers. The basis of the prime rate is the federal funds overnight rate. The federal funds overnight rate is the interest rate that banks use when lending to each other. The prime rate can be used as a benchmark for interest rates on other types of lending.
Principal is the original loan amount you borrowed. For example, if you take out one $100,000 loan for grad school, that loan’s principal is $100,000.
Private Student Loan
A student loan lent by a private financial institution such as a bank, credit union, online lender, or other financial institution. These loans can be used to pay for college and educational expenses, but are not a part of the Federal Direct Loan Program. These loans don’t offer the same borrower protections available to federal student loans — like income-driven repayment plans or deferment options.
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.
Repaying a loan plus interest.
The agreed upon term in which loan repayment will take place.
A type of financial aid which typically doesn’t need to be repaid. Scholarships can be awarded based on merit.
Secured Overnight Financing Rate (SOFR)
An interest rate benchmark that is commonly used by banks and other lenders to set interest rates for loans. The SOFR is the cost of borrowing money overnight collateralized by Treasury securities. Starting in June 2023, the SOFR will begin replacing the LIBOR as a benchmark interest rate.
Stafford loans were a type of federal student loan made under the Federal Family Education Loan Program. Beginning in 2010, all federal student loans were loaned directly through the William D. Ford Federal Direct Loan Program.
Standard Repayment Plan
The Standard Repayment Plan is one of the repayment plans available for federal student loan borrowers. This repayment plan consists of fixed payments made over an up to 10 year period.
Student Aid Report
After submitting the FAFSA you will receive a student aid report (SAR). The SAR is a summary of the information you provided when filling out the FAFSA.
Student Loan Refinancing
Using a new loan from a private lender to pay off existing student loans. This allows you to secure a new (ideally lower) interest rate or adjust your loan terms.
A Direct Subsidized Loan is a type of federal loan available to undergraduate students where the government covers the interest that accrues while the student is enrolled at least half-time, during the grace period, and other qualifying periods of deferment.
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.
The cost of classes and instruction.
A student who is enrolled in an undergraduate course of study.
A Direct Unsubsidized Loan is a type of federal loan available to undergraduate or graduate students. The major difference between subsidized vs. unsubsidized loans is that the interest on unsubsidized loans is not subsidized by the federal government.
Variable Interest Rate
Unlike a fixed interest rate, a variable interest rate fluctuates over the life of a loan. Changes in interest rates are tied to a prevailing interest rate.
Understanding key terms is essential for navigating student borrowing. Prioritizing sources of financial aid that don’t need to be repaid like scholarships and grants can be helpful. But these don’t always meet a student’s financial needs. Federal student loans have low-interest rates and, for the most part, don’t require a credit check. Plus they have borrower protections in place, like income-driven repayment plans or deferment options, that make them the first choice for most students looking to borrow money to pay for college.
When these sources of aid aren’t enough, private student loans can help fill in the gap. Keep in mind that, as mentioned, private loans don’t offer the same protections afforded to federal loans. If you’re interested in a private student loan, check out what SoFi has to offer. SoFi’s private student loans are available for undergraduates, graduate students, or the parents of undergraduates. Plus, qualifying borrowers can secure competitive interest rates and the loans have zero fees.
What are common student loan terms?
Student loan terms include Direct Loans — which are any loans in the Federal Direct Loan program. These include Direct Subsidized and Unsubsidized loans in addition to Direct PLUS Loans.
Beyond federal student loans, students can look into private student loans, which are offered by private lenders.
What are the most important loan terms to understand?
It’s important to understand terms associated with borrowing because you’ll be required to repay the loan. Understand the interest rate and any fees associated with the loan.
What does APR mean in relation to student loans?
APR stands for annual percentage rate. It’s a reflection of the interest rate on the loan in addition to any other fees associated with borrowing. APR helps make it easier to compare loans from different lenders.
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