As you compare student loans, you’ll likely stumble across at least a few student loan terms you’re unfamiliar with. Before you sign on the dotted line, familiarize yourself with this common student loan terminology that you might be unsure about.
Amortization is a complicated word for a simple meaning. It’s essentially the process of repaying your loan(s) back over a fixed period of time.
Auto-debit (also called auto-pay) is a feature that most lenders offer. When you sign up for auto-debit, your monthly payment will be paid by a card or automatically deducted from your bank account each month on the due date.
Capitalization, or capitalization of interest, is when the interest that has been accruing on your student loans is added to the principal balance.
The terms “consolidation” and “refinancing” are sometimes used interchangeably, but there is a specific difference between the two. Consolidation is when existing federal student loans are combined, or consolidated, into one new loan. (Refinancing is when existing private student loans, or private and federal student loans, are combined into one new loan.)
Your loan will be in default if you fail to repay depending on the terms of your loan. For federal student loans, you’ll enter default if you fail to make a payment for 270 consecutive days. For private student loans, requirements will vary, but are often more strict than federal terms.
Deferment is a way to defer, or pause payments to your student loan for a certain period of time. Federal student loans offer more lenient deferment options, while deferment on private student loans can vary by lender.
If you miss a payment on your loan, you are delinquent. This is reported to credit bureaus, and can lead to default.
Forbearance is an option for borrowers to pause payments on their student loan for a fixed period of time. If you’re worried about your ability to make payments, contact your lender or loan servicer to see what forbearance options may be available to you.
Master Promissory Note (MPN)
A Master Promissory Note (also called an “MPN” or just “Promissory Note”) outlines the terms and conditions of your loan. You will be required to sign this before loan funds are released.
An origination fee is essentially a processing fee that is charged when loan funds are disbursed. Not all student loans come with an origination fee.
The most well-known type of subsidized loan are federal Direct Subsidized Loans. With these loans, the government pays the interest on your loan while you are in school and during your grace period after graduation or periods of deferment.
Most private student loans are unsubsidized. The federal government also offers Direct Unsubsidized Loans. This means that you are responsible for paying the interest on your student loans, even while you are in school and during your grace period or periods of deferment.