Student loans are often necessary to pay for college education. To make matters worse, the student loan process is pretty convoluted, and can add hours to the college application process. But fear no more! This glossary will cover some of the buzzwords associated with the student loans and give you a better understanding of the process.
APR (Annual Percentage Rate)
APR is the yearly interest rate on a student loan. In other words, if you took out a $1000 loan with an APR of 2%, you’d have to make interest payments of 2% each year until you pay off the principal, which is the amount you are being loaned. So in this case, you have a $1000 principal and a 2% APR.
Auto-Debit
Auto-Debit is when you set up your loan payments to automatically pay your loans month by month. Doing this is smart because sometimes you’ll get lower interest rates in exchange for using auto-debit.
Capitalization
Let’s say you fail to pay all of your interest in the first year of your loan. In that case, the government might capitalize the loan by adding the interest payment you owe to your principal. In other words, If I took out $1000 and failed to pay the $20 in interest that I owed, then my loan principal will become $1020 the next year due to capitalization and I’d be paying 2% interest on $1020 instead of $1000. This doesn’t seem that big of a deal, but it can really add up when you’re taking out larger loans.
Consolidation
This is when you combine a bunch of individual loans into one big loan so you can pay everything off at once. Be careful when you do this, because you may lose some benefits such as loan forgiveness if you consolidate. However, there are also benefits to consider such as possible interest reductions and an easy to follow payment system (because you’re paying one loan instead of multiple).
Default
Default is when you can’t pay your loan off after 270 days. Don’t default on your loans because doing so will ruin your credit score and put you under financial stress. Obviously, that’s easier said than done, so this should just serve as a warning that you should never put yourself in a position in which you can’t pay off your debt.
Discharge
This means you’re off the hook from your loan!
Forgiveness
Forgiveness is when a portion of your loan is discharged. So in the previous example, you may have $200 taken off your $1000 principal because of loan forgiveness.
Income Based Repayment
This is when you decide to pay your student loans back based on a percentage of your income, not just on a month by month basis. There are few specific types of income based payment plans. For instance, the Pay As You Earn plan has you contribute 10% of your income toward your student debt.
Unemployment Deferment
If you are unemployed and looking for work, the government will postpone your loan payments temporarily.
This is the jargon that most people may not already be familiar with, but the number one rule when it comes to student loans is simple. When you can take on debt, it’s not a bad idea – but when you can’t take on debt, avoid it at every opportunity. This doesn’t just mean you should avoid principals that are too high, but it’s probably more important to pay attention to interest rates. Low enough interest rates can make debt financially favorable in some situations, but it’s something to look at with caution.
If you found this glossary helpful, you should create a myOptions profile to gain more access to helpful explainers like this one!