Coming to “Terms” with Student Loan Debt
I have always loved words. While others might stream Netflix on their phones or listen to Spotify, I play word games; Word Collect, WordWizard, Wordbubbles, Word Nut, and Word Chums. In thinking about how my love of words developed, I credit my Dad. From a young age, whenever I asked him what a word meant, he’d reply, “Go look it up.” And I did. On the 3rd floor of the house I grew up in, we had an old (circa 1954) Encyclopedia Britannica set. It was slightly outdated but useful, nonetheless. And next to it – The Webster’s New World Dictionary of the American Language.
Housed within the navy-blue fabric cover was every word I needed to know. The dictionary has been a lifelong friend; one that has filled me with wonder and knowledge, and even now, I am excited when I come across an unfamiliar word. These days, I use the dictionary app on my phone, or I open dictionary.com on my laptop, but a hard copy dictionary still sits on a shelf in my office.
My home office, at one time, was truly just a place to pay bills and write thank you notes. But here we are, almost springtime 2021, and our home offices are now the places where we connect via Zoom, work in our sweats and slippers, and long for the time when “things get back to normal”.
Normal: conforming to the standard or the common type. Yes, the theme of this blog is definitions. The linguistics of student loans is a language all to its own. Shedding some light on keywords and providing information is the goal, starting with pertinent terminology.
- Private Student Loan: A student loan obtained from a bank, a credit union, or from an online lender is considered “private” (as opposed to a federal student loan). Private loans are best used to fill a college payment gap after maxing out federal loans. Payments may be deferred while attending college or graduate school (though some lenders may require a borrower to make small, interest-only payments while enrolled in school). Interest rates may be fixed or variable.
- Student Loan Servicer: A Student Loan Servicer is a private company that manages your student loan payments until they are repaid. It is responsible for all loan-related administration, including responding to questions, processing payments, and facilitating changes to your repayment plan. Click here for information.
- Subsidized Loans: A subsidized federal student loan is one that does not accrue interest while a borrower is in college or during other periods of authorized non-repayment. The federal government pays (or “subsidizes”) the interest that accrues.
- Unsubsidized Loans: An unsubsidized federal student loan Is one that begins to accrue interest immediately upon disbursement. Undergraduate, graduate, and professional students are eligible for an unsubsidized loan, and the loan is not based on financial need.
Math was never my strong suit, hence my B.A. in English. But there is jargon specific to the student loan space that is numbers related. Albert Einstein once said that “mathematics is, in its way, the poetry of logical ideas.” Now that phrase speaks to the English major in me!
- APR: Annual Percentage Rate is the full cost of a loan. It includes the interest and any fees related to a loan. The APR provides a borrower with an idea of the total cost over the life of the loan.
- Consolidation: Consolidation is a process that combines multiple federal student loans into one loan, through the Department of Education. A Direct Consolidation Loan enables a borrower to make one loan payment each month. Consolidation loans are also available at private lending institutions, but a borrower would no longer be eligible for federal repayment options and advantages.
- Debt to Income Ratio: DTI is the percentage of a person’s gross monthly income that goes toward debt payments. It is used by lending institutions to determine someone’s borrowing risk. The lower the DTI, the more likely a borrower will be approved for auto loans, mortgage loans, and credit applications.
- Interest Rate: An interest rate is a percentage of the principal (loan amount) charged by the lender for the use of its money. Some loans have fixed interest rates, meaning the interest rate remains the same throughout the life of the loan. Other loans may have variable interest rates, meaning the interest rate could change (increase or decrease) throughout the life of the loan.
- Refinancing: Refinancing is the process of replacing a current loan with a new one that most likely has a lower interest rate.
The 1960 song, Wonderful World, sung by Sam Cooke, begins with “Don’t know much about history…” The history of student loans in the US is like a melody that begins slowly and rises to the crescendo of $1.71 trillion dollars, according to Forbes Magazine in February 2021.
- Direct PLUS Loans: These are federal loans that graduate or professional degree students AND parents of dependent undergraduate students can apply for to help pay education expenses. Parent PLUS loans and Grad PLUS loans have fixed interest rates and are not subsidized.
- FAFSA: Completing the Free Application for Federal Student Aid is the form the federal government, colleges, states, and other organizations use to determine a family’s expected contribution to the cost of college and allows colleges to award financial aid. To be eligible for federal student loans, the FAFSA form must be completed.
- Perkins Loan: The Federal Perkins Loan Program, formerly known as the National Defense Student Loan Program, was created to specifically help students of exceptional financial need. Under federal law, this low-interest loan program was ended in September 2017.
- Stafford Loan: Stafford Loans (aka Direct Loans) are a type of federal student loans that are either subsidized (the government pays the interest while a borrower is in school) or unsubsidized (the borrower pays all the interest). Undergraduate, graduate, and professional students, regardless of need, are eligible for the unsubsidized Stafford loan. Only those pursuing undergraduate studies can apply for the subsidized Stafford Loan.
Maybe you completed your homework in study hall. Perhaps you secretly texted friends. I remember seeing classmates catnapping behind open textbooks. Did you study for a vocabulary quiz? I imagine the following words might not have been included on your test.
- Default: Default is the point at which debt collection efforts commence when payments have not been made on a loan. Federal student loans default after 270 days, and private student loans default after 120 days. Defaulting on a loan may cause creditors to sue, garnish wages, or seize tax refunds.
- Extended Payment Plans: Borrowers who have more than $30,000 in federal student loans may be eligible for the Extended Repayment Plan. Extensions may be granted by contacting the student loan servicer. If the term of a loan is extended, a borrower may pay more interest over time, but will most likely be able to make smaller monthly payments.
- Forbearance: Student loan forbearance is an option that lets you temporarily pause your monthly student loan payments for up to twelve months. A student loan servicer may have a borrower fill out a form, provide documentation, and will determine if forbearance criteria has been met. As of Feb. 1, 2021, all federal student loan payments and collections have been paused and the interest rate set at 0% due to the economic impact of COVID-19.
- Income-Driven Repayment Plans: Income-driven repayment plans are designed to make student loan debt more manageable by reducing your monthly payment amount. If a borrower needs to make lower monthly payments or if outstanding federal student loan debt represents a significant portion of the borrower’s annual income, there are options. Click here for more information regarding income-driven repayment plans.
We become informed in such varied ways; digitally, in print form, by listening to others, and in the classroom. Impact Capital Funds hopes today’s lesson has provided readers with a clearer sense of the lingo used in the student loan space.
While we seek to inform, we also provide an opportunity for borrowers to refinance their loans. As I think back to my Dad’s adage of “go look it up,” I often wondered why he didn’t just tell me what a word meant. Now I know. He was steering me towards my love of language, a way with words, and the ability to learn for myself and thus, share the knowledge gained with others. Readers…aren’t you lucky?!