WTFinance: What Are All These Student Loan Terms?
Real talk — college is a blast. From all of the new experiences, lifelong memories, and irreplaceable friendships (and of course knowledge, too), it was a priceless time in our lives.
But after you graduate and begin to adjusting to that #adulting life, it can be easy to forget that there is still one part of college that stays with you for several years after you’re done — your student loans. The hefty bill can come as a shock; it’s one thing to understand how much your tuition costs, but it’s another to be the one actually paying the monthly bills after you walk across the stage.
For most, student loans are likely the first time you are paying off a big purchase and are encountering several unfamiliar financial and loan-related terms. It’s a pretty safe bet that you and your friends have never stayed up late discussing capitalized interest on a Friday night. While these new terms can feel like a foreign language, they’re really easy to navigate with the right resources.
One helpful tool is the Federal Student Aid website. Their glossary covers the majority of unfamiliar terms you may see on your loan statements. Out of this mega list, we’ve pulled out the top 5 student loan terms you should begin mastering today (pencils ready??).
So before you rip open your first bill and say ‘WHAT THE FINANCE do all of these words mean?!’ take note of the list below.
Acceleration: We know what you’re thinking: no this has nothing to do with driving a car, but it is similar to going from zero to sixty. Acceleration is the demand for you to immediately repay your current outstanding loan amount. That’s right — Every. Single. Penny. Why would you have to pay your loans back so fast and furiously, you ask? Well, acceleration only occurs if you:
- Make false statements on your loan application.
- You are not considered at least a part-time student. If you are not enrolled in courses at least half-time, your loan payments will start to kick in.
- Use your loan money to pay for anything unrelated to your education (And no, a spring break trip to Cabo does not count as “related to your education” – nice try!).
- Default on your loan payments along the way.
Cliff notes version? As long as you avoid the above scenarios, acceleration should never apply to you.
Capitalized Interest (Capitalization): While you’ve likely already mastered the art of capitalization in your grammar, capitalization on a loan is completely unrelated. Capitalized interest is the interest that you have not paid that gets added to the principal balance of your loan (aka the amount you originally borrowed). Where does this unpaid interest come from? Typically it will accrue during your grace period, since this is time where you aren’t making any loan payments. This essentially increases the amount that you owe, but hey, no one ever said a loan was free! Quite the opposite in fact…
Looking for tips to avoid gaining capitalized interest? Student Loan Hero has you covered!
Forbearance: Need some time to pull your finances together? A forbearance is basically a deferment of payments on your loan. This allows you to temporarily stop making payments on your loan or reduce your monthly payment. But before you say hallelujah, each federal loan servicer has their own policy on forbearances, meaning some are required to offer you this benefit and others are not. The great news about forbearance is that it does not affect your credit score, however you will continue to accrue interest during your forbearance period, which will increase the amount you owe overall.
Grace Period: This is the wonderful freebie period of time you get before you have to start making payments on your loan. It typically starts the day after you graduate, leave school, or are taking less than part-time classes, and lasts for six to nine months. While you’re not required to make payments during this time, it certainly doesn’t hurt to! Grace periods are unfortunately not available for every loan out there, so be sure to check if your loan has a grace period before you assume you’re in the clear.
Income-driven repayment plan (IDR): These types of repayment plans base your monthly payments on your yearly salary. There are several types of these plans, including:
- Revised Pay As You Earn Repayment Plan (REPAYE)
- Pay As You Earn Repayment Plan (PAYE)
- Income-Based Repayment Plan (IBR)
- Income-Contingent Repayment Plan (ICR Plan)
Now I know what you’re thinking, “IDK what the right plan is for me?!”. StudentLoans.gov, breaks down all you need to know about each of these options, but fair warning: some math will be required to calculate which one makes the most sense for you.
Loan forgiveness: In some cases you may not be obligated to repay outstanding student loans. But before you do the debt-free dance, we should mention this only applies to very specific situations, including:
- Your job qualifies you for loan forgiveness (i.e. jobs in public service or the military).
- Closure of your school while you are still a student.
- Your identity was stolen and used to get a loan.
- Permanent disability or death of the loan recipient
Now that you have a better sense of the financial terms you’ll encounter when tackling your student loans, how are you planning on fitting those payments into your financial plan? The good news is that it is very easy to become a master of budgeting with Mint. We are here to help keep your savings goals on track so you can pay off your loans on a timeline that works for you!