13 Confusing Student Loan Terms You Need to Know Before You Ruin Your Finances

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 — finds them confusing. As much as you might want to not think about it, it’s important you understand your student loan, 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

graduation cap, diploma and money
You send payments to your servicer. | iStock.com

Your student loan servicer is the company to whom you send your student loan payments. It might 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

cartoon of graduate chained to bag of money representing a student loan
There are plans to make payments more manageable. | iStock.com

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

Doctor and patient
Medical expenses could be an acceptable reason for forbearance. | iStock.com/daizuoxin

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 whether it offers forbearance.

4. Deferment

U.S. Army soldier
You might be able to defer your loan payments due to active military duty. | iStock.com/ajr_images

Deferment is a temporary suspension or reduction of your student loan payments during certain situations, such as 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 whether it offers deferment.

5. Student loan forgiveness

woman carrying box labeled "debt" up a ladder leaning against a stack of books
There are ways to lighten your debt load. | iStock.com

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 might have to pay taxes on the forgiven balance, as the IRS might see it as income.

6. Delinquency

hand checking poor option for credit score
Being delinquent on a student loan payment hurts your credit score. | iStock.com

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

Old bank sign engraved in stone
You can set up automatic student loan payments from your bank account. | iStock.com/BrianAJackson

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

form that says "student loan repayments"
If you haven’t been making your payments, you’ll default on your student loan. | iStock.com

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

student loan application
You always can apply for a new loan with a better rate. | iStock.com

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

graduation cap on top of coins
Consolidation combines all eligible loans into one payment. | iStock.com

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

alma mater statue
If you’re still in school, the government pays your interest on a subsidized student loan. | Mario Tama/Getty Images

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

12. Unsubsidized

sign that says student next to a dish for spare change
You are responsible for all interest, even while in school, with an unsubsidized student loan. | iStock.com

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

Sad college student sitting on a bench in park
You could rack up interest on top of interest. | iStock.com/Ljupco

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.
This article originally appeared on Credit.com.

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