Reading student loan docs might bring you back to that high school AP class where you ‘borrowed’ answers from your friend. But learning the language of loans can help you feel more confident about making some big money decisions. Like whether to refinance and how to pick the right federal repayment plan. Consider these Skimm’d definitions your new study guide.
Capitalization: When unpaid interest is added to your loan. Think of it as monetary punishment for not making payments. A lot of capitalized interest means you’ll end up paying back WAY more than you borrowed. Not fun.
Co-signer: Someone who vouches for you when you apply for a loan. They agree to take responsibility for your debt if you can’t keep up. Signed, sealed, delivered: it’s (basically) theirs.
Consolidation: Combining multiple federal loans to simplify your life. You might get a lower monthly payment now if you extend the loan term. But stretching out your timeline means you’ll end up paying more in interest over time.
Default: When you break your promise to pay back a loan. Future tax refunds, financial aid, and part of your paycheck could become collateral damage.
Deferment: Pressing ‘pause’ on repaying your student loans. Not ideal. But you’re not defaulting (aka asking for permission to stop paying), which hurts your credit. Silver lining.
Direct Loan: The John and Jane Smith of student loans. Because it's one of the most common ways to borrow money for education from the federal gov.
Disbursement: When you apply for a loan, you don’t get the money right away. Disbursement is like payday. It usually bypasses your wallet and goes directly to your school.
Fixed Rate: Interest that puts a ring on it. "Fixed" means your rate doesn’t change, no matter what happens in the economy. If you have a fixed-rate loan, you’ll know exactly what you’ll be paying back in the future.
Forbearance: Another way to freeze your debt payments. Good news: forbearance is usually easier to qualify for than deferment. Bad news: interest keeps running, so your balance could be much bigger when you start paying again.
Grace Period: The calm before the loan repayment storm. It starts right after you graduate or stop going to school full-time. And usually lasts about six months. So you have time to get your financial sh*t together before you start paying your lender.
Graduated Repayment: When the gov eases you into higher monthly payments by starting low and cranking them up every two years. To help you get debt-free in 10.
Income-based Repayment: A federal repayment plan that caps your monthly bill at 10-15% of your discretionary income. Nice if you’ve got a lot of debt compared to your income.
Interest: How lenders make money off you. Interest is what gets added to your principal, meaning you end up paying back more money than you initially borrowed.
Principal: The amount of money you owe without interest rate strings attached. As you make payments over time, the principal will go down. And so will your stress. Namaste.
Public Service Loan Forgiveness: A federal program that erases your loans if you hold down a nonprofit or gov job and make on-time payments for a decade. It’s got a reputation for being hard to actually cash in.
Refinancing: Same loans, different outfits. Refinancing is when you get a new loan on the same money so you can get a lower interest rate. You have to use a private lender.
Servicer: Like your student loan pen pal in charge of admin tasks (think: collecting payments, answering Qs). They don’t actually lend you money, but they manage the process after you start paying it back.
Subsidized Loan: A federal loan that helps undergrads in need. Pro: the gov will cover your interest tab while you’re in school or your loans are deferred. Cons: there’s a lower limit to how much you can borrow. And it’s only for undergrad loans.
Variable Rate: Interest that hasn’t defined the relationship yet. "Variable" means your interest rate can change based on outside factors. It could go way down or way up. Gamble at your own risk.
Subscribe to Skimm Money
Your source for the biggest financial headlines and trends, and how they affect your wallet.