College Student Loan Glossary 101: FAFSA, Consolidation, Deferment, and Other Important Terms
Getting a student loan can feel like an overwhelming task for both college students and their parents. It’s important that you sit down with an expert– like a high school guidance counselor, a college financial aid professional, or a banker– to find out what kind of loan you need and how to get it. But in the meantime, here’s a glossary of basic student loan terms that will help you figure out what those confusing forms mean.
Consolidation: student loan consolidation is a process that allows students to combine their student loans and make one monthly payment. Here’s some more information about student loan consolidation.
Default: a loan goes into default if it hasn’t been paid after a given period of time. This can do very serious damage to someone’s credit rating and lead to the garnishing of their wages.
Deferment: this is an approved period of time when a borrower does not have to make loan payments. Reasons for a deferment include enrollment in graduate school or economic hardship. Depending on the terms of the deferment, the borrower may or may not have to pay interest on the loan during this time.
Expected Family Contribution: based on the financial information a student supplies in their FAFSA, the government determines how much money the family can afford to spend on their child’s education that year. The lower the EFC, the higher the financial aid offer.
Federal Student Loan: these are loans that are made (1) directly from the U.S. Department of Education to the student (through the Federal Direct Student Loan Program) or (2) through a private organization that is guaranteed against default by the government (through the Federal Family Education Loan Program). Colleges and universities participate in one of these two programs.
Forbearance: a period of time when a borrower pays the interest on a loan but not the loan payments themselves. This is usually because of financial hardship.
Free Application for Student Financial Aid (FAFSA): this form is step #1 to a student loan or any type of federal financial aid for undergraduates and graduate students. Students (and parents, unless the student is not a dependent) must supply detailed information about their finances. This information is used to determine how much financial aid a student should be offered.
Grace period: this is a period of time (usually six or nine months) after graduation, during which the graduate does not have to start making loan periods.
Interest: the amount of money paid by the borrower in exchange for getting the loan. Interest payments are computed into monthly loan payments. Borrowers want to get a low interest rate because they will pay less interest throughout the life of the loan.
Perkins Loan: a type of federal student loan that comes with a 5% interest rate.
PLUS loans: these are student loans that issued to parents or to graduate students. Payments on these loans begin immediately and usually come with a higher interest rate than other loans that go directly to students. Parents may borrow as much as the price of the student’s education, minus the amount of the financial aid package.
Private student loans: These loans are granted by lenders (such as banks) and not the government. There are two types: (1) school-channel loans, which are distributed from the lender to the school and offer lower interest rates, and (2) direct-to-consumer loans, which go directly to the student in a shorter period of time, but come with higher interest rates.
Stafford Loan: a type of federal student loan that comes with a fixed interest rate.
Subsidized federal student loan: these are loans that are awarded based on financial need. The government pays the interest on these loans while the student is still in school, during the grace period, and during some loan deferment periods.
Unsubsidized federal student loans: these loans are not based on financial need. Most students are eligible for up to $5500 in unsubsidized student loans, depending on their year in college. Students have to pay interest on these loans while they are still in school and during the grace period.