Terminology in Student Loan

Stumped by the terminology used by lenders? Don’t be. Here is a list of the most common student loan terms and what they mean:

Borrower. In this case, you. The individual who is responsible for repaying a loan.

Capitalization. The interest that builds up over time and is added to your principal (otherwise known as “capitalized” inter-est). Be careful about capitalization, it can hike the total cost of your loan.

Consolidation. To merge some or all of your student loans into one über loan, with one interest rate and one payment per month.

Default. What happens if you fail to repay your loan. Usually a precursor to a bad credit rating and, consequently, financial troubles in obtaining further loans to buy a home or a car or go back to school again.

Deferment. A delay of payments on your student loan. To gain a deferment, a lender may make you prove “eligibility” criteria like being sick or unemployed.

Discharge. A release from your obligation to repay your loan permanently.

Fees. Additional expenses tacked to your total loan amount due, or subtracted from the amount of money you receive with your loan funds.

Forbearance. A time period when you can skate on your loan payments because of extenuating conditions and you do not qualify for a deferment.

Grace period. A six- or nine-month period after you leave school and have to start making regular payments on your student loans.

Interest. The fee you pay for the privilege of borrowing money from your lending institution (it’s their profit margin). Interest is based on a percentage of your total loan.

Principal. The total amount you owe on your student loan.

The Players in Student Loan

Who takes center stage on student loans? Well, you are on one side and a public or private lending institution is on the other. Who are these other players and what roles do they play in the loan process? Let’s take a look.

Federal government. Yes, Uncle Sam, under the official guise of the U.S. Department of Education, runs the federal student loan programs. The federal government can be either a lender or a guarantor, which is an institution that guarantees your loan.

Borrower. You, basically, unless your mom, dad, grandmother, or grandfather have signed off on your student loan. The borrower is the person who gets the student loan and is obligated to pay it off.

Lender. The institution that cuts you the check for your student loan. A lender can be the government, a bank, a credit union, or another financial institution. Here’s a list of potential lenders:

• Bank

• Savings and loan association

• School

• Credit union

• Pension fund

• Insurance company

• Consumer finance company

• Federal government

Your school. Don’t forget old almamater. Your school can identify financial aid options, figure out how much you need, help you get the loan, and administer it. They’re also on the back end when you have to pay the loan when you leave.

The guarantor. Usually a federal agency that guarantees to your lending institution that you’ll actually pay back the money you borrowed. If you don’t pay off the loan, the guarantor has to.

The credit bureau. The private agency that keeps tabs on your loan payments and makes your “credit score” available to others interested in your ability to pay back money that you owe. That could be a mortgage company, or a retail store, or an automobile dealer—in short, anyone who is going to make a financial commitment with you.

The collection agency. The agency that will come after you, sent by the guarantor, if you default on your loans and make no arrangements to pay them back. Usually, the collection agency earns about 30 percent of your total outstanding loan if they can get you to pay it back.

The credit counselor. In some cases, you might need professional advice on getting out of student loan debt. A reputable credit counselor can show you how to rearrange or consolidate your loans so you’re not in default. Not all credit counselors are reputable, though