13 Confusing Student Loan Terms You Need To Know Before You Ruin Your Finances
There’s no need to water down: student loans are complicated, and everyone from new borrowers to those who have been paying them for more than a decade, find them confusing. Even if you don’t want to think about it, it’s important that you understand your student loan, and that starts with knowing the meanings of terms you’re likely to come across in the student loan world. Here are 13 confusing loan terms you need to know.
Your student loan manager is the company you send your student loan payments to. This may be where you got your student loans in the first place, and your duty officer could change as you pay off your loans. Federal loan borrowers can find their student loan manager by logging into the National Student Loans Data System. If you have private student loans, your student loan administrator is the institution you borrowed the money from.
2. Repayment options
Federal student loan borrowers can repay their student loans in a number of ways, and they can change their plan at any time for free (although it may take a while). Options include plans that allow you to reduce your payments based on your income and plans that allow you to spread your payments over a longer period of time. You can read more about your student loan repayment options here.
Forbearance is a temporary suspension or reduction of your student loan payments when you are unable to make payments due to financial problems, medical bills, unemployment, or “other reasons acceptable to your loan manager.” , according to the Department of Education. Your loan will continue to accumulate interest during this period and will be added to the principal balance when you come out of forbearance.
You must ask for abstention. There are several circumstances in which your duty officer is required to grant forbearance (mandatory abstention), including medical or dental internship or residency, National Guard duty and many more. You can only receive forbearance for 12 months at a time. If you have a private student loan, check with your lender to see if they offer a forbearance.
Deferral is a temporary suspension or reduction of your student loan payments in certain situations, such as unemployment, economic hardship, school enrollment, or active military service, among others. You are not responsible for paying interest accrued on some student loans during the deferral, but most are.
You must request an adjournment and you can stay on the adjournment as long as you meet the conditions. If you have a private student loan, check with your lender to see if they offer a deferral.
5. Student loan exemption
There are several programs that allow you to get rid of all or part of your federal student loans, and you can find out more here. Keep in mind that you may have to pay taxes on the canceled balance because the IRS might consider it income.
You’re late on a student loan when you haven’t made a payment on your student loans for 30 days or more since your last payment was due. Your student loan officer will most likely report the late payment to major credit reporting agencies, which will hurt your credit. (You can see how your student loans are affecting your creditworthiness by viewing your credit report summary for free on Credit.com.) Delinquency also tends to come with late fees.
7. Automatic debit
Many student loan administrators refer to automatic payments as “automatic debit,” which means your payment is automatically withdrawn from your bank account on the due date each month. You can often get an interest rate reduction by signing up for direct debit. It is usually at least 0.25 percentage point.
By default, this means that you haven’t made a student loan repayment for a long time and, therefore, your entire student loan balance is now due. Your loan will likely have been sent to a debt collector at this point. For federal student loans, you enter default after failing to make a payment for more than 270 days. This period is generally shorter for private student loans. You can read more about the (very) negative consequences of defaulting on a student loan here, as well as how to get over it.
Refinancing your student loans means taking out a new loan to pay off your existing loans, ideally to make your loans more affordable. For example, you can take out a student loan that has an interest rate lower than the average interest rate of all your existing student loans, which can save you money over the life of the loan. Refinancing a student loan requires taking out a private student loan because the federal government does not offer any refinancing options. You can also refinance a student loan by paying it off with a home equity line of credit.
A federal consolidation loan combines all of your eligible federal student loans into one loan with one payment. The interest rate for this loan is the weighted average of the interest rates of all included loans, rounded to the nearest eighth of a percent.
With a subsidized loan, the government pays the interest on your student loan while you are in school or during a deferral period.
12. Not subsidized
With an unsubsidized loan, you are responsible for all of the interest that accrues on your loan while in school, deferral, and forbearance. If you don’t pay the interest during this time, it’s added to your principal loan balance.
13. Capitalized interest
Any interest you accumulate while it’s not being repaid can be added to your principal balance, which means you’ll pay interest on top of that interest. This is the capitalized interest.
This article originally appeared on Credit.com.