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Student Loan Terms & Definition Explained

student loan terms & definition

Student loan terms & definition can be a daunting and complex subject to tackle, with a multitude of terms and definitions that can easily leave borrowers feeling overwhelmed and confused. However, understanding these terms and definitions is crucial for any student loan borrower who wants to navigate the world of student loans effectively. In this guide, we’ll provide you with a comprehensive overview of the most important education loan terms & definitions you need to know. From interest rates to deferment and forbearance, we’ll cover it all in a way that’s easy to understand and follow. So, whether you’re a student about to take out your first loan or a seasoned borrower looking to brush up on your knowledge, this guide will have something for you. Let’s get started! 

Types Of Student Loans

Student loans are a type of financial aid that can help students cover the costs of higher education. There are two main types of student loans: federal and private. Understanding the differences between these two types of loans can help students make informed decisions about which type of loan to pursue.

Federal Student Loans:

Federal student loans are loans that are offered by the federal government. These loans typically have lower interest rates and more flexible repayment options than private loans. There are several types of federal student loans, including Direct Subsidised Loans, Direct Unsubsidised Loans, Direct PLUS Loans, and Federal Perkins Loans. Each of these loans has specific eligibility requirements, interest rates, and loan limits.

Private Student Loans:

Private student loans, on the other hand, are offered by private lenders, such as banks, credit unions, and other financial institutions. These loans typically have higher interest rates and fewer repayment options than federal loans. Private loans also often require a co-signer, especially for undergraduate students who have little or no credit history. However, private loans may be a good option for students who have maxed out their federal loan options or who need additional funding beyond what federal loans can provide.

When considering federal and private student loans, it’s important to understand some of the key terms and definitions associated with each type of loan. For federal loans, some important terms include “subsidised,” which means the government pays the interest on the loan while the student is in school, and “unsubsidised,” which means the student is responsible for paying the interest on the loan while in school. For private loans, important terms include “fixed interest rate,” which means the interest rate remains the same for the life of the loan, and “variable interest rate,” which means the interest rate can change over time.

Common Student Loan Terms & Definition

Navigating the world of student loans can be overwhelming, especially when it comes to understanding the different terms and definitions. Let’s take a closer look at some common student loan terminology.

Interest rate: Education loan interest rate refers to the percentage of the loan balance that must be paid in addition to the principal. This is essentially the cost of borrowing money.

Principal: Principal refers to the original amount borrowed. When you make payments on your loan, you are paying down the principal balance, as well as any accrued interest.

Grace period: A grace period is a set amount of time after you graduate, leave school, or drop below half-time enrolment, during which you are not required to make payments on your loans. This is designed to give you time to find a job and get on your feet financially.

Moratorium Period: The moratorium period in education loan refers to the time after an education loan is first disbursed to a borrower and before repayment must begin. This period allows time for the student to complete their education before starting repayment. For most education loans in India, the moratorium period runs while the student is enrolled and usually for 6 months after completing their education.

Deferment: Student loan deferment is a period during which you are allowed to postpone making payments on your loans. This is typically granted for certain circumstances, such as going back to school or experiencing economic hardship.

Forbearance: Forbearance is similar to deferment in that it allows you to temporarily postpone making payments on your loans. However, interest continues to accrue during this time, so it’s important to make payments if you can do so. The difference between student loan deferment vs. forbearance is deferment has strict eligibility criteria and requires formal application, while forbearance is more broadly available and has a simpler process. Deferment periods are typically longer, up to 3 years, compared to 12 months renewals for forbearance. Interest continues accruing during forbearance but does not accrue on subsidised loans in deferment.

Default: Education loan Default occurs when you fail to make payments on your loans as agreed. This can have serious consequences, including damage to your credit score and wage garnishment.

Repayment plan: A student loan repayment plan outlines the terms of your loan repayment, including the length of time you have to repay your loans and the amount of your monthly payment.

Loan servicer: A loan servicer is the company that handles your student loan account. This is the entity that you will make payments to and that will communicate with you about your loans. 

Loan consolidation: Debt consolidation loans is a process of combining multiple loans into a single loan. This can make it easier to manage your debts by simplifying the repayment process. However, it is important to note that consolidation does not necessarily reduce the overall amount of debt you owe. 

Loan forgiveness: Loan forgiveness, on the other hand, is a process by which you may be relieved of some or all of your loan debt. This typically applies to certain types of loans, such as federal student loans, and may be granted under certain circumstances, such as public service or disability. Loan forgiveness can provide significant relief for borrowers who are struggling to repay their debts. 

Student loan forgiveness tax: Student loan amounts forgiven through federal repayment programs are generally exempt from being taxed as income. However, private student loan forgiveness or other discharged consumer debt outside of federal programs typically does get reported to the IRS and can count as taxable income in the year it is forgiven. This means borrowers may owe income taxes on the cancelled debt amount.

Cosigner: A co-signer or a co-applicant in education loan is someone who agrees to take responsibility for a loan if the primary borrower cannot make payments. Co-signers are often used by lenders to help secure loans for individuals who may not have strong credit histories or income. It is important to carefully consider the responsibilities and risks associated with co-signing a loan, as it can impact your credit and financial situation.

Prepayment Penalty: A prepayment penalty is a fee that may be charged by lenders if you pay off your loan early. This penalty is designed to compensate lenders for the interest they would have earned if you had continued to make payments on the loan. It is important to review the terms of your loan carefully to understand if a prepayment penalty applies and how it may impact your repayment strategy.

Capitalisation: Capitalisation refers to the process by which unpaid interest is added to the principal balance of a loan. This can increase the overall amount you owe, as interest will then be charged on the higher principal balance. Capitalisation can occur in certain situations, such as when you enter into repayment after a period of deferment or forbearance.

Origination fee: An origination fee is a fee charged by lenders to cover the costs of processing a loan application. This fee is typically a percentage of the total loan amount and can be included in the overall cost of the loan. It is important to review the terms of your loan carefully to understand if an origination fee applies and how it may impact the overall cost of your loan. 

Accreditation definition: Accreditation is the process by which an external body evaluate and certify an educational institution or academic program to meet certain quality standards. Accrediting agencies are private educational associations that develop evaluation standards and criteria to assess educational quality.

Borrower defence to repayment definition: Borrower defence to repayment refers to a legal provision that allows federal student loan borrowers to have their loans forgiven if the school they attended engaged in deceptive or predatory practices, or otherwise violated applicable state laws related to the borrower’s loans.

Debt to income ratio definition: A student loan debt-to-income ratio (DTI) is a personal finance measure that compares the total of your monthly debt payments to your gross monthly income. This ratio indicates how much of your income goes toward paying debts. Lenders may use your DTI when determining whether you qualify for additional credit or loans.

Expected family contribution definition: Expected family contribution (EFC) refers to the amount of money a family can reasonably be expected to contribute financially toward a student’s college education. This figure plays a role in determining eligibility for financial aid. The information reported on a student’s FAFSA form is used to calculate their EFC.

Income-driven repayment definition: Income-driven repayment plans are designed to make federal student loan debt more manageable by reducing monthly payments to amounts borrowers can more likely afford. Monthly payments are based on income and family size. Any outstanding balance is forgiven once the repayment period ends. Examples include IBR, PAYE and REPAYE.

Student loan refinancing definition: Refinancing student loan is the process of taking out a new private loan to repay one or more existing student loans. This allows borrowers to potentially qualify for lower interest rates and monthly payments on their student debt. Not all borrowers will qualify for refinancing, however.

Collateral definition: Collateral refers to a borrower’s pledge of specific property to a lender to secure repayment of a loan. The collateral serves as a lender’s security or protection in case the borrower fails to repay the loan. With student loans, there is typically no collateral pledged, which leaves the lender at greater risk compared to other loan types.

Sanction letter definition: A sanction letter for education loan in lending refers to an official letter sent by a financial institution informing a borrower that they are in default of their loan obligations. This serves as a demand from the lender for immediate payment or other corrective action from the borrower. Failure to remedy the default can result in legal action.

Margin money definition: Margin money refers to a partial down payment or deposit required from a borrower on certain types of loans, such as home loans or auto loans. The margin money reduces the risk for the lender while allowing the borrower to finance the remaining amount. Education loans may also require students to contribute a percentage of fees.

APR definition: APR, or annual percentage rate, represents the true yearly cost of borrowing money and taking into account the total costs associated with the loan, including any origination fees or other charges. Comparing APRs can provide borrowers with the clearest picture when evaluating and comparing different loan offers. Difference between APR Vs. interest rates is that the interest rate refers specifically to the percentage fee charged to borrow money, while annual percentage rate (APR) expresses the total cost of borrowing including interest and other fees. So APR provides the most complete picture of loan costs over the full term and is often higher than just the interest rate.

Understanding Your Loan Agreement

When you borrow money, it’s essential to understand the terms of your loan agreement. This document lays out the specifics of your loan, including the interest rate, repayment schedule, and any fees associated with the loan. Failure to read and understand your loan agreement can lead to confusion, missed payments, and potentially even defaulting on your loan.

To make sure you’re fully informed about your loan, it’s crucial to review your loan agreement carefully. Here are some tips for doing so:

  • Start with the basics. Make sure you understand the interest rate, repayment schedule, and any fees associated with the loan. If you’re unsure about any of these terms, ask your lender to explain them to you.
  • Look for any hidden costs. Some lenders may include hidden fees or charges that aren’t obvious at first glance. Carefully review the loan agreement to ensure that you’re aware of all the costs associated with the loan.
  • Check for any prepayment penalties. If you plan to pay off your loan early, make sure to check whether your loan agreement includes any prepayment penalties. If so, these fees could make it more expensive to pay off your loan ahead of schedule.
  • Understand the consequences of defaulting on your loan. If you’re unable to repay your loan, you could face significant consequences, including damage to your credit score and even legal action. Make sure you understand what could happen if you’re unable to make your loan payments.
  • Ask questions. If there’s anything in your loan agreement that you don’t understand, don’t hesitate to ask your lender for clarification. It’s better to be fully informed than to sign a document you don’t understand.

Take Away

Understanding student loan terms & definition can be a challenging task. However, it is a critical step in managing your student loan debt. Here are some key takeaways to remember:

  • Know the difference between federal and private student loans. Federal loans usually have more favourable terms and conditions, such as lower interest rates, more repayment options, and loan forgiveness programmes.
  • Familiarise yourself with the types of federal loans available. There are Direct Subsidised and Unsubsidised Loans, PLUS Loans, and Perkins Loans. Each loan type has its eligibility requirements, interest rates, and repayment terms.
  • Understand the loan terminology. Some key terms are known to include a grace period, deferment, forbearance, principal, interest, and default. Knowing these terms can help you better understand your loan agreement and avoid any surprises down the road.
  • Keep track of your loan balance and repayment schedule. Make sure you know when your payments are due, how much you owe, and how long it will take you to pay off your debt.

Hence, understanding the study loans terms & definitions of student loans is crucial for successfully managing your debt. It can help you make informed decisions about borrowing, repayment, and refinancing. Additionally, it can help you avoid costly mistakes, such as defaulting on your loan or missing out on valuable loan forgiveness programmes. With the right knowledge and tools, you can take control of your student loan debt and achieve financial stability.


Q1. What are student loan terms and definitions?

Student loan terms and definitions refer to the language and vocabulary used in loan agreements and related documents. These terms can include interest rates, repayment periods, grace periods, and other conditions that borrowers need to understand to manage their student loan debt effectively.

Q2. Why is it important to understand student loan terms and definitions?

Understanding student loan terms and definitions is crucial for managing your debt effectively. It can help you make informed decisions about borrowing, repayment, and refinancing. Additionally, it can help you avoid costly mistakes, such as defaulting on your loan or missing out on valuable loan forgiveness programmes.

Q3. What are some common student loan terms?

Some common student loan terms include principal, interest, grace period, deferment, forbearance, loan servicer, and default. Understanding these terms can help you better understand your loan agreement and avoid any surprises down the road.

Q4. How can I learn more about student loan terms & definitions?

There are many resources available to help you learn more about student loan terms & definitions. These can include online guides, government websites, financial advisors, and loan servicers. It’s important to take the time to research and educate yourself to make informed decisions about your student loan debt.

Q5. Are student loan terms & definitions the same for all types of loans?

No, the terms & definitions of student loans can vary depending on the type of loan you have. Federal loans have different terms and conditions than private loans, for example. Additionally, each loan type has its eligibility requirements, interest rates, and repayment terms, which can impact the language and vocabulary used in loan agreements. It’s important to understand the specific terms and conditions of your loan to effectively manage your debt.

PS: If there’s anything more you’d like us to know about. Add it to the comments section!

Thank you for reading this blog post on Understanding The Student Loan Terms & Definition. We hope that it has provided valuable information for prospective students considering this university.

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student loan terms & definition

Student Loan Terms & Definition Explained

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