Student Loan Glossary
The world of student loans is filled with confusing jargon. We translated it into plain English.
Accrued Interest
Interest that accumulates daily on the unpaid principal balance of a loan. If you don't pay enough to cover the accrued interest each month, your loan balance will grow.
Avalanche Method
A debt repayment strategy where you make minimum payments on all loans, but put every extra dollar toward the loan with the highest interest rate. This mathematically saves the most money over time.
Capitalized Interest
Unpaid interest that is permanently added to the principal balance of a loan. Once capitalized, you begin paying interest on the new, higher balance (interest on interest).
Consolidation
A federal process that combines multiple federal student loans into one new Direct Consolidation Loan. The new interest rate is a weighted average of the old rates. It simplifies repayment but doesn't save money on interest.
Default
Failure to repay a loan according to the terms agreed to in the promissory note. For most federal student loans, you will default if you have not made a payment in 270 days. Defaulting leads to severe consequences like wage garnishment.
Deferment
A temporary pause on student loan payments during certain circumstances, such as returning to school or economic hardship. Subsidized federal loans do not accrue interest during deferment.
Discretionary Income
For student loan purposes, this is the difference between your annual income and a percentage of the poverty guideline (e.g., 225% for the SAVE plan or 150% for IBR) for your family size and state. Income-Driven Repayment plans base your payment on this number.
Extended Repayment
A federal repayment plan that allows you to repay your loans over an extended period (up to 25 years) rather than the standard 10 years, lowering your monthly payment but increasing total interest paid.
Federal Direct Loan
A student loan provided by the U.S. Department of Education. These are the most common student loans and come with robust borrower protections, including IDR plans and PSLF eligibility.
Forbearance
A temporary postponement or reduction of student loan payments, typically granted for financial hardship. Unlike deferment, interest continues to accrue on all types of loans during forbearance.
Forgiveness
The cancellation of all or a portion of your remaining federal student loan balance. This is typically achieved through programs like Public Service Loan Forgiveness (PSLF) after 120 qualifying payments, or after 20-25 years on an IDR plan.
Grace Period
A set period of time after you graduate, leave school, or drop below half-time enrollment before you must begin making payments. For most federal loans, this period is six months.
Graduated Repayment
A federal repayment plan where payments start low and increase every two years, usually designed to be paid off within 10 years. It assumes your income will grow steadily over time.
IBR (Income-Based Repayment)
An income-driven repayment plan that caps your monthly payment at 10% or 15% of your discretionary income and offers loan forgiveness after 20 or 25 years of qualifying payments.
Income-Driven Repayment (IDR)
An umbrella term for federal repayment plans that tie your monthly payment to your income and family size rather than your total debt. Includes SAVE, PAYE, IBR, and ICR.
Interest Rate
The cost to borrow money, expressed as an annual percentage of the principal. Federal loans have fixed rates, while private loans can have fixed or variable rates.
Loan Servicer
A company assigned by the Department of Education or a private lender to handle the billing and other services on your student loan. They are your main point of contact for repayment.
PAYE (Pay As You Earn)
An income-driven repayment plan that caps your monthly payment at 10% of your discretionary income and forgives remaining balances after 20 years of qualifying payments.
Principal
The original amount of money you borrowed, plus any capitalized interest. Interest is calculated based on this number.
Private Student Loan
A non-federal loan made by a lender such as a bank, credit union, or state agency. They require credit checks and do not qualify for federal forgiveness or IDR plans.
PSLF (Public Service Loan Forgiveness)
A federal program that forgives the remaining balance on Direct Loans after you have made 120 qualifying monthly payments (which takes 10 years) under a qualifying repayment plan while working full-time for a qualifying employer (government or non-profit).
Refinancing
The process of taking out a new private loan to pay off existing student loans, usually to secure a lower interest rate. Refinancing federal loans turns them into private loans, permanently losing federal protections.
SAVE Plan
Saving on a Valuable Education (SAVE) is an IDR plan that provides the lowest monthly payments for many borrowers. It increases the income exemption threshold to 225% of the federal poverty line and stops unpaid interest from growing your balance.
Snowball Method
A debt repayment strategy where you pay off loans in order of smallest balance to largest balance, regardless of interest rate. It provides quick psychological wins to keep you motivated.
Standard Repayment
The default federal repayment plan. It splits your loan balance into equal monthly payments designed to pay off the entire loan, plus interest, in exactly 10 years.