The A to Z’s of college loan terms

Learning about student loans can be confusing — from creating a payment plan, to understanding subsidized versus unsubsidized loans, there’s a lot to cover. Here are some key terms you need to know about.

Taking out loans for college is a reality for many students. Perhaps you’ve just been accepted to your top-choice university and you’re wondering how to finance it, or maybe your degree is nearly complete and it’s time to start thinking about repayment. No matter where you are in your pursuit of higher education, it’s important to understand your student loans and how they impact your financial future. From A to Z, here are the phrases you’re likely to come across in your loan agreement.

Default

Neglecting to make your loan payments in accordance with your contract that outlines the terms and conditions of your loans. Depending on the type of loan, it could go into default as soon as you miss one payment. Others may be considered in default after nine months of non-payment.

Deferment

The ability to stop making payments on federal loans for a short period of time. This could apply if you’re enrolled in school, unable to find full-time employment, serving in the military or experiencing economic hardship. You may not have to pay the accrued interest on your loans during this time.

Endorser

A person, perhaps a parent or other relative, with good credit history who agrees to repay your student loans if you’re not able to.

Expected family contribution

This determines your eligibility for financial aid and is calculated based on the information provided on your Free Application for Federal Student Aid (FAFSA).

Forbearance

Similar to deferment in that it allows those who are eligible to temporarily cease making payments because of reasons such as change in employment, financial difficulties or medical expenses. Unlike deferment, however, you are responsible for paying the interest that accrues during your forbearance period.

Grace period

A period of time after a borrower graduates, leaves school or drops below half-time enrollment where he or she is not expected to make payments on student loans. A typical grace period is six to nine months.

Loan forgiveness

Sometimes referred to as discharge or cancellation, this is the dismissal of the borrower’s obligation to repay an outstanding student loan. Forgiveness is granted in limited circumstances, such as working for a government agency or nonprofit organization, bankruptcy or death.

Master promissory note

The document you sign in which you promise to repay your student loans. This is a contract that outlines the terms and conditions of your loans.

Repayment period

The maximum amount of time you have to repay your student loans. This typically ranges from 10 to 30 years, depending on your loan amount and repayment plan.

Repayment plan

A plan you agree to with a lender to repay your student loans. The type of plan you choose will determine your monthly payment amount and how many payments you ultimately make. Your options include:

• Extended repayment plan: Fixed or graduated monthly payments made for up to 25 years for loans totaling more than $30,000. 
• Graduated repayment plan: Monthly payments start out low and increase every two years, up to a period of 10 years (or up to 30 years for consolidated loans).
• Income-based repayment plan: Monthly payments are calculated by taking 15 percent of your discretionary income (10 percent if you’re a new borrower) and dividing by 12.
• Income-contingent repayment plan: Monthly payments that equal whichever is lesser between what you’d pay on a fixed monthly repayment plan for 12 years, or 20 percent of your discretionary income divided by 12.
• Income-sensitive repayment plan: Monthly payments are based on your annual income, with the total loan amount being paid within 15 years.
• Pay as you earn repayment plan: Monthly payments equal 10 percent of your discretionary income, divided by 12. 
• Standard repayment plan: Monthly payments of at least $50 for up to 10 years (or up to 30 for consolidated loans). Though your monthly payments may be higher, you’ll pay off your federal loans faster, saving you money on interest.

Subsidized loan

A federal student loan, the amount of which is determined by your school and cannot exceed your financial need. Interest is paid by the U.S. Department of Education while you're in school, during your grace period and during deferment.

Unsubsidized loan

Available to all students, regardless of financial need, though your school still determines the amount you can borrow. You are responsible for paying interest during all periods of this type of loan.

Get more tips and information to help you understand what your options may be to help you pay for a college education.