13 Confusing Student Loan Terms You Need to Know

It's important you understand your student loans, and that starts with learning the meaning of the terms you're likely to encounter in the student-loan worl

There’s no need to sugarcoat it: Student loans are complicated, and everyone from new borrowers to those who’ve been paying them for more than a decade find them confusing. As much as you might want to not think about them, it’s important you understand your student loans, and that starts with knowing the meaning of the terms you’re likely to encounter in the student-loan world. Here are 13 confusing loan terms you need to know.

1. Servicer

Your student loan servicer is the company to whom you send your student loan payments. It may or may not be the place you got your student loans in the first place, and your servicer could change as you repay your loans. Federal loan borrowers can find out their student loan servicer by logging into the National Student Loan Data System. If you have private student loans, your student loan servicer is the institution from which you borrowed the money.

2. Repayment Options

Federal student loan borrowers can pay back their student loans in several ways, and they can change their plan at any time for free (though it can take some time). The options include plans that allow you to lower your payments based on your income and plans that allow you to spread out your payments over a longer term. You can read more about your student loan repayment options here.

3. Forbearance

Forbearance is a temporary suspension or reduction of your student loan payments when you are unable to make payments as a result of financial problems, medical expenses, unemployment or “other reasons acceptable to your loan servicer,” according to the Education Department. Your loan will continue to accrue interest during this time and will be added to the principal balance when you exit forbearance. You must apply for forbearance. There are several circumstances under which your servicer is required to grant forbearance (mandatory forbearance), including a medical or dental internship or residency, National Guard duty and many others. 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 forbearance.

4. Deferment

Deferment is a temporary suspension or reduction of your student loan payments during certain situations like unemployment, economic hardship, enrollment in school or active military duty, among others. You are not responsible for paying the interest that accrues on some student loans during deferment, but you are for most. You must request deferment, and you can stay in deferment as long as you meet the requirements. If you have a private student loan, check with your lender to see if they offer deferment.

5. Student Loan Forgiveness

There are several programs that allow you to get rid of some or all of your federal student loans, and you can read about them here. Keep in mind you may have to pay taxes on the forgiven balance, as the IRS may see it as income.

6. Delinquency

You are delinquent on a student loan when you haven’t made a payment on your student loans for 30 or more days since your last payment’s due date. Your student loan servicer will most likely report the late payment to the major credit reporting agencies, which will hurt your credit. (You can see how your student loans affect your credit standing by viewing your free credit report summary on Credit.com.) Delinquency also tends to come with late fees.

7. Auto Debit

Many student loan servicers call automatic payments “auto debit,” meaning your payment is automatically taken from your bank account on the due date every month. You can often get an interest rate reduction by enrolling in auto debit. It’s usually at least 0.25 percentage points.

8. Default

Default means you have not made student loan payments in a long time, and as a result, your entire student loan balance is now due. Your loan will have likely been sent to a debt collector at this point. For federal student loans, you enter default after you’ve failed to make a payment for more than 270 days. That time period is generally shorter for private student loans. You can learn more about the (very) negative consequences of student loan default here, as well as how to recover from it.

9. Refinancing

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 a lower interest rate than the average interest rate of all your existing student loans, which can save you money over the life of the loan. Student loan refinancing requires taking out a private student loan, as the federal government offers no refinancing option. You could also refinance a student loan by paying it off with a home equity line of credit.

10. Consolidation

A federal consolidation loan combines all your eligible federal student loans into a single loan with one payment. The interest rate on that loan is the weighted average of all the included loans’ interest rates, rounded up to the nearest one-eighth of one percent.

11. Subsidized

With a subsidized loan, the government pays the interest on your student loan while you are in school or in deferment.

12. Unsubsidized

With an unsubsidized loan, you are responsible for all the interest that accrues on your loan during school, deferment and forbearance. If you do not pay the interest during that time, it is added to your principal loan balance.

13. Capitalized Interest

Any interest you accrue while not in repayment can be added to your principal balance, meaning you will pay interest on top of that interest. That’s capitalized interest.

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Fewer People Are Behind on Their Private Student Loans

private-student-loans

Any good news about student loans is sure to raise an eyebrow or two. After all, there aren’t a lot of good things to say about something that’s weighing on Americans’ finances and breaking records like an athlete hopped up on performance-enhancing drugs.

Despite that, there seems to be something positive happening in the world of private student loans. According to a new report, fewer borrowers are falling behind on their loan payments, which suggests they are better able to handle their education debt than they were a few years ago.

The report comes from MeasureOne Private Student Loan Consortium, which includes the six largest holders and lenders of education debt: Citizens Bank, Discover, Navient, PNC, Sallie Mae and Wells Fargo. Their portfolios make up more than 65% of private education lending in the U.S., according to MeasureOne’s website.

Private student loan delinquency and charge-off rates are at their lowest since before the financial crisis, the report says, and a smaller share of borrowers have put their loans into a state of forbearance.

The report focuses on data from the first quarter of 2016 and how it compares to first-quarter data from previous years. It does not include consolidation loans.

Here are some standout figures:

  • There was a 16.8% decline from last year in the late-stage delinquency rate (loans more than 90 days past due).
  • The early stage delinquency rate (loans 30 to 89 days past due) is down 9% from last year.
  • 2.2% of loans were in forbearance, which is a 4.1% decline from the same time last year and down 26.6% over the last 5 years.
  • Charge-offs made up 2.3% of loans in the first quarter, down from 5.1% five years ago. That’s a 54.5% decline. (A lender charges off a loan when it does not expect to get the money back from the borrower. That’s generally when a loan is sold to a debt collector.)

It’s important to note that private student loans only make up a very small portion of the more than $1.35 trillion in outstanding student loan debt in the U.S. (about 7.5%, or $102 billion, according to the report).

Still, the repayment improvement among this subset of student loan debtors is noteworthy. Private student loans generally don’t offer a lot of flexibility to borrowers who may have trouble affording their payments, which can make them even harder to repay than federal student loans. (In addition to forbearance, federal student loan borrowers can look into repayment options like deferment, income-based repayment or student loan forgiveness.)

Paying Back Your Student Loans

Struggling to make student loan payments can be really problematic, considering how missing any loan payment, education or otherwise, can have a seriously negative effect on your credit score, and a bad credit score can lead to all sorts of financial obstacles.

On top of that, the vast majority of private student loan borrowers need a co-signer to get these loans, meaning the missed payments affect not just the primary borrower (presumably the student) but also the person who helped get the loan. That’s often a parent or close family member. (You can see how student loans affect your credit by getting two free credit scores and regular updates on Credit.com.)

Since student loans can be very difficult to discharge in bankruptcy (though it’s possible), that makes it even more important to find a way to manage them, whether that’s looking into some sort of repayment plan or student loan consolidation.

If you have questions about your repayment options, start by talking to your student loan servicer. You can also share your questions on student loans in the comments.

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