Student loan lingo: The terms to know before you borrow
When it comes to funding a college education, student loans appear to be growing in popularity. In fact, an October 2011 USA Today article, writer Dennis Cauchon reported that student loan debt was expected to pass the $1 trillion mark by the end of 2011, exceeding credit card debt in the U.S. Furthermore, the College Board reports that student loan debt doubled in the last five years.
So what's with all of the borrowing? Using student loans to finance an education is becoming a necessity for many students as the cost of education rises precipitously every year. The College Board reports that over the last decade, the cost to attend public, four-year colleges has increased at an average of 5.6 percent per year above the rate of inflation.
Understanding your loan options, rights and responsibilities before you borrow is the best way to stay ahead of the game. Here, get a breakdown of the "loan lingo" you may hear when researching your loan options.
The education loan play book
Since July 1, 2010, the following top student educational loans are funded and administered by the federal government through the William D. Ford Direct Loan program:
- Subsidized Federal Direct Loan
- Unsubsidized Federal Direct Loan
- Direct PLUS Loan
Alternative or private education loans, the only other game in town, are funded by banks or financial services entities such as Sallie Mae.
Know your loan lingo
Understanding loan terms can help clarify the borrowing experience and give you some control over your borrowing future. Here are terms you should know:
- Capitalized interest: Interest is added to the loan principal and accrues more interest. This occurs when you defer interest payments for an unsubsidized loan.
- Consolidation: Combining different educational loans into one loan with one monthly payment.
- Credit check, cosigner: For Direct PLUS loans and private loans, the lender checks the borrower's credit history; an adverse history may require a cosigner or endorser with a good credit history who agrees to repay the loan should the borrower default.
- Default: You stop making loan payments; serious consequences ensue.
- Deferment: If you meet certain criteria, repayment is postponed and interest does not accrue on subsidized loans; it does accrue on unsubsidized loans.
- Grace period: The time after you leave school/graduate and before you have to start repaying your loan.
- Entrance/Exit counseling: Understanding your loan and repayment commitment and responsibilities.
- Forbearance: This is a temporary fix if you don't qualify for a deferment. Forbearance allows you to stop making payments, make smaller payments, or extend the length of your repayment period. Interest does accrue on all loans during forbearance.
- Forgiveness, discharge or cancellation: You don't have to repay the loan. Reasons include entering certain teaching or public service professions; school closure or related issues; or disability or death. Most student loans will remain after a bankruptcy, but in certain instances they may be included in a bankruptcy.
- Promissory note: Loan "promise-to-repay" paperwork that defines your loan rights and responsibilities.
- Repayment plans: Different repayment plans are available to meet the diverse needs of borrowers.
- Subsidized/Unsubsidized loans: Repayment is delayed until you leave school/graduate; for subsidized loans (best deal), the government pays interest while you are in school and during the grace period; for unsubsidized loans, you pay the interest.
To learn more, the Federal Direct Loan website offers detailed explanations of these terms.
Private loans: Staying in the game
To remain in the education lending game, private lenders have had to somewhat rethink their lending strategy. "Some believe there should be more risk sharing in the relationship between the student borrower and the lender. Innovative lenders are searching for a balance in private education loan terms, to improve outcomes for students while still turning a profit," says Tonio DeSorrento, a lawyer with Orrick, Herrington & Sutcliffe LLP in Washington, D.C., whose clients include private education lenders.
Examples of ideas that are currently under consideration are repayment plans tied to income, similar to the repayment options offered through the Federal Direct Loan program, and lending decisions based on academic information plus individual performance to determine the likelihood of a student's graduation and success in the workforce. "Another particularly innovative idea is adding a moral component to repayment," said DeSorrento. "For example, engineering alumni at a university may provide loan capital as an investment in future members of their engineering community; repayment by the beneficiaries then becomes a moral commitment to the community."
Student education loans: Keeping your head in the game
Student education loans are big business. The outstanding federal education loan portfolio is currently at $848 billion, with 146 million separate loans made to more than 36 million student borrowers, according to the 2011 Federal Student Aid Annual Report. Make it your business to understand not only the loan lingo, but your rights and responsibilities before you jump into the education loan game.