Breaking down student loan jargon: A simple guide to key terms

Breaking down student loan jargon

Student loans can sometimes feel like a whole other language filled with confusing words and fine print. But breaking it down into simple terms can make it easier to understand. Whether you’re just starting to explore options or already managing a loan, knowing the basics can help with making more confident decisions. 

Breaking down the basics

Principal – The base price of your loan, or the amount you borrow before any interest is added. This is the starting point for what you’ll need to pay back.

Interest Rate – The cost of borrowing money, shown as a percentage on your loan amount. It determines how much extra you’ll pay on top of the principal you borrowed. Interest accrues (grows) over time, so the longer it takes to repay the loan, the more interest adds up.

Grace period – A set time (usually six or nine months) after you leave school before you have to start repaying your loan. This gives you some breathing room to find a job and get financially settled before payments kick in.

Deferment and forbearance – Options that allow you to temporarily pause or reduce your loan payments, like if you’re going back to school or hit a rough patch. In deferment, you may not have to pay interest on certain types of loans. In forbearance, payments can also be paused, but interest continues to grow, which can add to your overall loan balance.

Cosigner – Someone (usually a parent, guardian, or trusted adult) who agrees to take responsibility for the loan if you can’t make payments. Having a cosigner can help you qualify for a loan or get a lower interest rate.

Loan forgiveness – If you qualify, some or all of your student loans may be canceled (yes, really!). This usually applies to people working in public service jobs or those on income-driven repayment plans. It’s a way to reduce or eliminate debt after meeting certain requirements.

Capitalization – When unpaid interest gets added to your loan’s principal balance, increasing the total amount you owe. This can happen after a grace period, deferment, or forbearance.

Prequalification – Think of this as a sneak peek at what loan amount and rates you might be eligible for. It helps you get an idea of your options before making a decision. Best part? There’s no commitment and no impact to your credit score.

Repayment term – The length of time you have to pay back your loan. Common terms range from 10 to 25 years, depending on the repayment plan you choose.

Income-Driven Repayment (IDR) plans – Payment plans that adjust your monthly payment based on your income and family size. These can make payments more affordable and may lead to loan forgiveness after a certain number of years.

Delinquency — This happens when you miss a payment and don’t catch up within a certain time, making your loan overdue. Being delinquent can lead to late fees, which increase the total amount you owe.

Default – This happens when you fail to pay your student loans and now have consequences. Defaulting can hurt your credit score, lead to extra fees, and even result in money being taken directly out of your paycheck.

Consolidation – Consolidation is combining several student loans into one loan. You won’t necessarily get a lower interest rate, but you have the convenience of just one payment.

Refinancing – Taking out a new loan to pay off existing student loans, usually to get a lower interest rate. Unlike federal loans, refinancing is done through private lenders and may mean losing federal benefits like income-driven repayment and forgiveness options.

FAFSA® (Free Application for Federal Student Aid) – The form used to apply for federal financial aid, including grants, work-study, and student loans. Schools use FAFSA® info to determine financial aid packages, so filling it out each year is key to getting the most aid possible.

Got questions about the FAFSA®? We’ve got a guide that’s got all the answers to help maximize your financial aid.