11 Student Loan Definitions You Should Know

Educate yourself thoroughly before borrowing any money for college.

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Late summer and early fall are the times of year when many students and young adults are making important money decisions. High school students are applying to college and thinking about the amount of financial aid they might be eligible to receive once they are able to file the FAFSA, beginning October 1. Any financial support they do not receive through savings, grants, college scholarships, and the federal work-study program might have to be made up through student loans.

Students about to enter college could be scrambling to put the last pieces of their financial aid puzzle into place. And recent college graduates know that their student loan repayment deadline looms just over the horizon.

All of these people are making choices that could affect their financial stability for many years to come. That is why it is important to educate yourself thoroughly before borrowing any money for college. Here are a few crucial student loan definitions to get you started:​

Types of Student Loans

  • Federal student loans: These are usually the loan of first choice because the federal government is your lender. Interest rates are competitive, there are a variety of repayment plans available, and loan forgiveness is possible under certain circumstances. The one drawback is that the government can be very tenacious if these loans are not paid back according to their terms.
  • Subsidized student loans: These are federal student loans where the federal government pays the interest which accrues during the time you are in school. If you have unsubsidized loans, you will be responsible for paying this interest.
  • Private student loans: These are loans made by private lenders, and must be studied thoroughly to differentiate available options for interest rates and repayment terms.
  • Servicer: This is the company that is responsible for maintaining your loan information, and collecting your loan payments. It may be your lender, or it may be an entity designated by the lender to serve this purpose.
  • Loan limit: This is the maximum amount of money you can borrow, and is usually limited to the cost of the college you are attending minus the financial aid you will receive. There are annual and aggregate loan limits.
  • Interest rate: This is a percentage of the loan that you will be required to pay in addition to repaying the principal amount that you borrowed. Interest rates may be fixed, which means that they will stay the same throughout the life of your loan, or they may be variable, which means they can fluctuate with the prime interest rate. Usually, when interest rates are low, you want to lock in a low, fixed rate.
  • Interest accrual: This means that interest is building up on your loans. It may start building during the time you are in college, even if you are not yet making any payments on your student loans.
  • Co-signer: This usually applies more to private student loans, and is another person in addition to the borrower who agrees to accept responsibility for repaying your loan. If the initial borrower does not meet the repayment terms, the lender may look to the co-signer for satisfaction.
  • Default: A default happens when you fail to make loan payments according to the set agreement. Lenders have several courses of action they can take to collect money when a loan goes into default. This may also show up as a negative item on your personal credit report.
  • Deferment: This is a period where you are not required to make any payment, usually through your college years and for a short time after graduation. Interest usually accrues during this period but does not on subsidized federal student loans.
  • Discharge: This means you are no longer required to make payments on your loan. It usually happens when you have repaid all of the money borrowed, plus interest, but there are special circumstances, such as disability, where you may be able to get the loan discharged before completing all payments.

Never borrow any money without understanding everything you are agreeing to in the loan contract. Don’t be afraid to ask questions before you sign on the dotted line.