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10 Student Loan Terms Explained

Student Loans 101


When it comes to paying for college, student loans are a crucial part of the financial equation for millions of Americans who might not be able to afford tuition on their own. According to the College Board, tuition and fees for public four-year colleges in the 2011-2012 academic year cost $8,244 for in-state students and $12,526 for out-of-state students on average, and private nonprofit four-year colleges cost $28,500 on average in tuition and fees this academic year. Multiply these numbers by four and you’ll get an idea of just how much damage earning that diploma can do to your bank account.

Understanding the ins and outs of student loans isn’t always easy, though, especially because of all the jargon associated with them. And if you’re confused by these terms, you’re not alone: The Consumer Financial Protection Bureau recently issued a press release reporting the feedback it received on its “Financial Aid Shopping Sheet” prototype, a financial aid disclosure form intended to make the costs and risks of student loans clear before students have enrolled. The CFPB found that an “overwhelming number” of people requested a section to review key terms – which indicates that the public is in need of more clarity when it comes to student loan terminology.

With that in mind, MainStreet spoke to financial experts to help define 10 student loan terms we think every borrower should know in language the average person can understand. We also tell you where you can expect to see these terms come up along the student loan process. Read on for the full list.

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Subsidized Loans


What they are: One of the most daunting parts of taking out a student loan is having to pay off the interest that it accrues. Luckily, students who qualify for a subsidized loan get a bit of a break, at least for a while. Subsidized loans, which are awarded based on financial need, don’t require students to pay interest until after they graduate.

“The neat aspect of subsidized loans is that the student does not have to worry about interest piling up while they are in school as the federal government will ‘subsidize’ or pay the interest,” says Peter D’Arruda, president of Capital Financial Advisory Group in Cary, N.C. “I feel this is a great way to get money because any time someone else is paying your interest, it’s a good thing. It also could be the reason a student stays in school instead of dropping out.”

With unsubsidized loans, on the other hand, the federal government does not pay interest while students are in school.

Where you’ll see this term: After you fill out the Free Application for Federal Student Aid (FAFSA), you’ll receive a letter from your school telling you the amount of subsidized and unsubsidized aid you qualify for.

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Default Rate


What it is: When a student defaults on a loan, it means he or she hasn’t kept up with their payments. The default rate, then, is a measure of the percentage of borrowers who are more than a specified number of days late, typically 360 days for federal education loans and 120 days for private student loans, says Mark Kantrowitz, publisher of the financial aid websites Fastweb.com and FinAid.org.

Student loan default rates have been making the headlines in recent months, as the sour economy has caused many Americans to fall behind on their loan payments. Back in September, MainStreet reported that the national student loan default rate rose to 8.8% in fiscal year 2009 (the most recent year data was collected), up from 7% in fiscal year 2008. The student loan crisis was also a focus of the Occupy Wall Street movement last year, with many protesting for the government to forgive student loan debt.

Where you’ll see this term: Because it’s such a hot topic, you’ll likely hear about default rates in the news. You can also check an individual college’s default rate on the Department of Education website.

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Grants


What they are: “Grants are my favorite kind of financial funding vehicle for colleges because they don't have to be paid back,” D’Arruda says. That’s right, grants are free money awarded to students to help pay for their tuition.

Be sure to complete the FAFSA to see if you qualify for federal, state or university grants. “Unless you’re independently wealthy, make sure you fill out the FAFSA, because you never know what you might qualify for,” says Reyna Gobel, author of Graduation Debt: How to Manage Student Loans and Live Your Life (CliffsNotes).

Where you’ll see this term: In addition to determining which students qualify for loans, the FAFSA also helps determine which students qualify for grants. You can download the FAFSA form here, and you’ll find the deadlines for state grants in the table on the right of the first page. The financial aid letter from your college should tell you if you qualify for any grants.

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Expected Family Contribution


What it is: This one’s a bit tricky – although the name implies that this is the set amount of money your family will have to pay for college, that’s not exactly the case. The Expected Family Contribution (EFC) is a dollar amount determined by information included on the FAFSA that represents how much your family should be able to contribute to your college education. It’s used by schools to figure out how much financial aid you’re eligible for at that particular institution, but you won’t always be expected to pay the exact EFC number that the government calculates. “Most families will end up paying more than the EFC,” says Kantrowitz, though that might not be the case if there is a lot of financial aid available at your school.

Your family's taxed and untaxed income, assets and benefits (such as unemployment or Social Security) are all considered in the formula, and your family size and the number of family members who will attend college or career school during the year are also taken in to consideration.

To get an early estimate of how much financial aid you’re eligible to receive, you can answer some questions through the FAFSA4caster on the Department of Education’s website.

Where you’ll see this term: The FAFSA will be used to calculate your EFC, and your Student Aid Report will list your EFC. (According to the Department of Education, you should receive your SAR by email within 3-5 days after your FAFSA has been processed if you provide an email address when you applied, or 7-10 days by mail if you did not provide an email address.) The financial aid office at your college will then use the information on your FAFSA and EFC to determine how much aid you’ll receive.

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Borrower Grace Period


What it means: Thankfully, you don’t have to start repaying your student loan the day after you graduate. Federal loans will give you a “grace period,” before you have to begin repayment, and even that can be extended in certain financial situations. You can also get a grace period if you leave school or drop below half-time enrollment.

The grace period is six months for a federal Stafford Loan and nine months for federal Perkins Loans.

Where you’ll see this term: You can get more information on federal student loan grace periods by visiting the Department of Education website.

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Deferment


What it is: Sometimes circumstances prevent borrowers from being able to make payments on their student loans, and when that happens you can request a deferment – a temporary period during which you’re not required to make any payments.

“During a deferment the government pays the interest on any subsidized loans, while the borrower is responsible for the interest on any unsubsidized loans,” Kantrowitz says. He adds that private student loans do not offer deferments, though.

Where you’ll see this term: You have to apply for a deferment through your loan servicer, and you must continue to make payments until you’ve been notified that your deferment has been granted.

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Forbearance


What it is: If you’re not eligible for deferment, you can ask for forbearance, which is when borrowers are allowed to temporarily postpone their payments, or make smaller ones than originally scheduled.

“A forbearance is like a deferment, except that the government does not pay the interest on subsidized loans,” Kantrowitz says. In other words, whether you have a subsidized or unsubsidized loan, you’re responsible for paying the interest it accrues during the forbearance. “If the borrower does not pay the interest as it accrues, it is capitalized, increasing the size of the loan,” Kantrowitz adds.

Kantrowitz adds that forbearances have a five-year limit on federal loans and typically a one-year limit on private student loans.

Where you’ll see this term: You have to apply for forbearance through your loan servicer, and you must continue to make payments until you've been notified that your forbearance has been granted.

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Independent Student


What it is: When applying for financial aid, you’ll need to indicate whether you’re an independent student or whether you’re still dependent on your parents for financial support. This is important because being an independent student may give you more aid eligibility, says Gobel, but you have to meet certain requirements.

According to the Department of Education, independent students must be one of following: at least 24 years old, married, a graduate or professional student, a veteran, a member of the armed forces, an orphan, a ward of the court, or someone with legal dependents other than a spouse.

Where you’ll see this term: When you apply for federal student aid, your answers to questions on the FAFSA determine whether you are considered a dependent or independent student.

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Dependent Student


What it is: Dependent students are those who don’t meet the criteria to be considered an independent student (see previous slide). It’s important to know that even if your parents aren’t helping you pay your tuition, you could still be considered a dependent student, says Gobel.

Where you’ll see this term: When you apply for federal student aid, your answers on the FAFSA determine whether you are considered a dependent or independent student.

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Repayment Schedule


What it is: Repayment schedules tell you when your payments are due and the term of the loan. With federal loans, you have the choice of several repayment plans based on the type of loan you have. With standard repayment plans, for instance, you pay a fixed amount each month and have up to 10 years to pay the loan back. There are also two versions of extended repayment plans. One requires you to have more than $30,000 in federal loan debt and gives you up to 25 years for repayment. “Another version of extended repayment requires consolidation of your loans, but allows borrowers to extend the repayment term to 12, 15, 20, 25 or 30 years depending on the amount borrowed,” says Kantrowitz. You can find more specific information on repayment plans on the Department of Education website or FinAid.org.

Which repayment plan is right for you? “You want to budget realistically for the lifestyle you would live when you graduate from school,” Gobel says. “So figure out what the starting salaries are for the career you’d like to pursue and figure out where you want to live when you graduate. You want the best idea of what it will cost you to live so you know what you can safely borrow.”

Where you’ll see this term: Your loan servicer will provide you with information about your repayment schedule, including the date you have to start making payments. You can check out the National Student Loan Data System to find out who your loan servicer is, and you can visit the servicer’s website or call them to find out how to make payments.

Photo credit: Getty Images

Master the FAFSA


In order to qualify for student aid from the government, students must fill out the Free Application for Federal Student Aid (FAFSA), which changes each year. To help you get the most aid possible, MainStreet spoke to an expert to compile 11 essential tips for mastering the FAFSA.

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Kristin Colella is a writer/editor for MainStreet. You can follow her on Twitter at @KrisColella.

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