Student Loan Terms in Plain English
Summary: Student loan language doesn’t have to be confusing. Check out our easy definitions.
Time to read: 4 minutes
Who this is for: Seniors and Parents
The language used in loan documents can sound like anything but plain English. Here's a short guide to some phrases you might come across in your loan application, translated into plain talk.
Bad or poor credit If someone has poor credit, that means that they probably have a history of late payments on loans or credit cards. People with poor credit will either be unable to borrow, or will have to borrow at a higher interest rate. See Credit History below.
Capitalization If your loan is building up interest over time, but you are not making payments, the lender may, at a certain time, add all the unpaid interest to your loan and give you a new loan with that larger amount as the "principal" – the new amount that you will have to pay back.
Co-signer This is someone who agrees to pay back your loan if you don’t. You’ll get lower rates with a co-signer, but if you can’t make the payments, the co-signer will have to. Some people who co-signed on their children's student loans have found they need to delay retirement in order to have the income to pay the loans back.
Collection(s) When lenders have special companies call you to make sure you make your payments.
Credit History, Credit Score, Good Credit The rating that lenders use to rate a borrower's reliability in paying back a loan. If you borrow money or have a credit card, and you make all the payments on time, then you will have a good credit score, good credit history, and/or good credit.
Default This is a bad thing. It’s when a borrower stops making payments. There are usually a number of negative consequences when this happens.
Establishing credit If you have never borrowed, you may have no credit score. Borrowing and paying back student loans, and paying credit cards on time will help you establish good credit.
Interest Interest is one of the ways that lenders make money on the amounts you borrow from them. It’s a percentage that is added to the amount you borrow, calculated at an annual rate. When their materials refer to an APR (annual percentage rate), that number includes both interest and fees.
Loan fees This is an amount taken out of your loan every time you begin the process of borrowing more money. Loan fees are designed to pay for the time and effort that lenders put into processing their paperwork.
Loan servicer This is the business that handles the monthly statements and billing for your loan. They may or may not be part of the organization lending you the money.
Loan term This is the pre-agreed time you have to pay your loan back. In most cases, the term is set at the time you borrow, but with student loans it is set when you graduate. Normally most people take ten years. But if you pay it off faster, it will cost you less, because there is less time for the interest to add on.
Parent Plus loans These are loans that the federal government makes to your parents for your education -- provided they have good credit and enough income to pay the loans back. (see credit history)
Private loans These loans are made to students or their parents by private loan companies. Since these companies need to make a profit, the rates are often high. Each company has its own forms you must fill out.
Promissory note This is an agreement that the student (or parent) signs in which they promise to pay back a student loan. It outlines the details of the loan including the rate, the amount and when it needs to be paid back. Sometimes there are other restrictions including what the money can be used for.
Simple interest, compound interest Simple interest means you pay the interest rate times the amount of your loan every year. Compound interest is when you pay interest on the interest that's adding up, as well as the amount you borrowed. Student loans are calculated using simple interest.
Stafford Loans, William D. Ford loans, Federal Unsubsidized loans, Federal Subsidized loans These are various names for the student loans issued by the Federal Government. They are also known as Federal Direct loans.
Subsidized loans Subsidized loans are for students with financial need. With a subsidized loan, the government pays (or subsidizes) the interest while you are in school. This makes these loans less expensive to pay back.
Unsubsidized loans The interest on an unsubsidized loan begins to be charged as soon as the college gets the money for the semester. In other words, the interest starts adding up while you're in college, as opposed to a subsidized loan which doesn't add interest until after you graduate.
Student loan language doesn’t have to be confusing. Check out our easy definitions.