Student loan debt reached a record high in 2021, according to Experian data, with Americans carrying $1.6 trillion in educational loans.
Whether you're about to take out student loans to pay for school or you're currently paying off your college debt, understanding the common terms attached to student loans can help you better manage your loans, obtain relief and avoid some of the negative consequences that can happen if you're not cautious.
20 Common Student Loan Debt Terms
Depending on your situation and your plans for paying down your student loans, you may or may not need to be aware of every program that's available to borrowers. However, knowing what's available and what the different terms mean can help you make better decisions both in school and after graduation.
Here are some of the most frequent terms you'll come across with student loans:
During periods of deferment or forbearance, interest may continue to accrue on your student loans. Capitalization happens when you begin or re-enter repayment and the accrued interest is added to your principal balance. This increases your overall loan amount and monthly payments.
The federal consolidation program allows borrowers to combine multiple loans into one new one, either with their current loan servicer or with a new one. Consolidation can simplify your life by reducing the number of monthly loan payments to one and can also give you access to certain federal programs you didn't have access to before.
If you're applying for a private student loan, your approval odds and interest rate are based on your creditworthiness. If you haven't had the chance to build your credit history or your score is in poor shape, having a cosigner can help you get approved. Your cosigner, who should have a solid credit history, takes responsibility for paying back the loan if you can't.
Cost of Attendance (COA)
When taking out student loans, you may be limited to borrowing the total cost of attendance minus other financial aid you've received. This amount typically represents the total costs a student will pay to attend the school for a year.
If you fail to pay your federal student loans for 270 consecutive days, you'll be considered in default and must pay the full amount due plus interest, fees and collection costs. Fortunately, it's possible to get out of default through consolidation or rehabilitation. If you have private student loans, default can occur much sooner, and you may not have as many options for relief.
Federal student loan servicers and some private lenders allow you to defer monthly payments on your student loans while you go back to school or experience financial hardship. Review your deferment options and their requirements to see if you're eligible, as deferment rules can vary by lender.
When you fill out the Free Application for Federal Student Aid (FAFSA), your dependent status will determine how your school's financial aid office calculates your financial aid. If you're considered to be financially dependent on your parents, their financial information will be taken into consideration. But if you're considered independent, only your financial information is required.
Income-driven repayment plans base their monthly payment on your discretionary income. This figure is based on the federal poverty guideline, where you live, your household size and your annual income. Three of the four plans use 150% of the poverty guideline as a reference, but for the income-contingent repayment plan, it's just 100%.
Federal Student Loan
These are loans originated by the U.S. Department of Education and serviced by private companies that contract with the federal government. Federal student loans have standardized interest rates, don't require a credit check and come with many benefits that private student loans don't offer.
If you're experiencing financial hardship, you may be able to obtain forbearance, which pauses your monthly payments, typically for a few months at a time. Review your lender or loan servicer's forbearance options and criteria to see if you qualify.
After you graduate, leave school or drop below half-time enrollment, the federal government and many private lenders give you a grace period of six months before you need to start making payments on your student loans.
The federal government offers four income-driven repayment plans, which reduce your monthly payment to a percentage of your discretionary income. These plans also extend your repayment term to 20 or 25 years, depending on the plan. Once that term is over, any remaining balance will be forgiven.
Federal student loans come with an upfront loan fee that's deducted from your disbursement. It's relatively low for direct loans but higher for direct PLUS loans.
Private Student Loan
Private student loans are issued by private lenders, which include banks, credit unions and online lenders. Private loans require a credit check, and your interest rate will be based on your creditworthiness. They're generally best used if you're ineligible for federal student loans or if you've maxed out your allotment of federal loans.
After you graduate, you can refinance your student loans with a private lender. Depending on your situation, you may be able to secure a lower interest rate and more flexibility with your repayment plan. However, refinancing federal loans will cause you to lose access to certain benefits, including access to income-driven repayment plans and forgiveness programs, that are only offered on federal student loans.
If you've defaulted on your federal student loans, you can bring them out of default by rehabilitating them. This process requires you to make nine voluntary, affordable monthly payments within 10 consecutive months—the payment amount is determined by your loan servicer. Once you've completed the process, your loans will no longer be in default, and the default notation will be removed from your credit reports.
Undergraduate students who exhibit financial need may be eligible for federal subsidized student loans. With these loans, the federal government will pay your interest while you're still in school and during future periods of deferment. This program prevents interest from accruing and capitalizing.
Student Loan Forgiveness
The federal government offers various student loan forgiveness programs for public servants and teachers. Additionally, your loans may be forgiven if you've been defrauded by your school, if you experience a total and permanent disability, or if you die. In rare cases, discharge is also available through bankruptcy. Note that the Teacher Loan Forgiveness Program forgiveness amount can vary by applicant, while the other programs offer full forgiveness.
Student Loan Repayment Assistance
Many federal and state programs are available to help federal student loan borrowers pay down their debt. Depending on the program, you may be able to get thousands or even tens of thousands of dollars in assistance. These programs are designed to help military members, health professionals, public defenders, teachers and more. Additionally, many private companies offer student loan repayment assistance as an employee benefit.
These federal loans don't offer the benefit of the government paying your interest while you're in school and during deferment periods.
Use Your Student Loans to Build Credit
If you can afford it, make interest-only payments while you're in school to get credit for your payments and avoid interest capitalization, and after graduation, make sure you always pay your bill on time, even if it means getting on a payment plan with a lower payment amount.
Throughout this process, you can monitor your credit using Experian's free credit monitoring service to track your progress and to learn about other steps you can take to build credit and protect your identity.