Student Loans Demystified Part 2: Terminology Simplified

It can be difficult enough to know where to start as discussed in part 1. However, once you get started you then are faced with student loan terminology that can almost feel like a foreign language. The good news is that it can be understood and this blog post will help you as you work to become literate in student loan terminology.

Terminology is important because it can cost you extra money or save you money. Terminology included in this post will include interest rates, direct subsidized loans, direct unsubsidized loans, direct parent plus loans, forbearance, deferment, default, repayment plan.

There is not an exciting way to describe these terms. However, it is critical to understand these concepts to successfully manage repay your student loans and save as much money as possible.

Interest Rates

A student loan interest rate is the amount the student loan lender charges for the amount of money borrowed. Interest is repaid over the duration of a loan.

Direct Subsidized Loans vs Direct Unsubsidized Loans

There are two kinds of loans typically borrowed by undergraduate students. 1) Direct subsidized loans and 2) Direct unsubsidized loans. These are the most common loans borrowed by students

  
Type of loanSubsidized LoansUnsubsidized Loans
Eligibility for LoanFor a student to be eligible to borrow a subsidized loan they must demonstrate financial need. This is determined by the fafsa application.Unsubsidized loans are available to all students regardless of financial need.  
Interest AccrualThe Federal government will pay the interest of subsidized loans while you are in school at least half-time.The interest from unsubsidized loans begins to accrue immediately upon borrowing.
Borrowing OrderIf you are eligible for subsidized loans we suggest utilizing this loan firstWe suggest utilizing this loan if you are not eligible for a subsidized loan or have used the entire amount of subsidized loans available to you.
For any given year the interest rate for undergraduate direct subsidized loans and unsubsidized loans is the same percentage. Repayment begins six months after graduation or when you drop below half-time in school.

Direct Parent Plus Loans

A parent plus loan is another form of debt used to pay for the cost of attendance at universities. Parent plus loans differ from direct subsidized and unsubsidized loans in a few ways.

  • The borrower of a parent plus loan is not the student. The borrower is the student’s parent or guardian.
  • The interest rate for this form of debt is much higher than regular subsidized and unsubsidized loans. This means Parent Plus Loans cost will much more money over the duration of a loan.
  • Loans payments are due immediately for Parent Plus Loans, however, deferment of payment can be requested until the student graduates.
  • Interest will begin to accrue immediately, even if payments are deferred.

We caution students to be slow to fund their education by utilizing parent plus loans. There two reasons why we suggest this.

  • First, parent plus loans make paying for college more of a family ordeal at a level that needs to be recognized to avoid future strife. Prior to borrowing this form of debt, a conversation needs to occur with the family member borrowing the parent plus loan in their name. This conversation needs to clearly define what expectations the family member has of the student in regard to assistance in repaying the loan. Some family situations may require that the student solely be responsible for repayment and other families may commit to assist with repayment. If the student’s family member commits to assist with repayment we tend to advise that the student ensures that this decision is not going to have a significant negative impact on the family member’s finances.
  • Second, if a student is having to resort to parent plus loans it means they have already borrowed the maximum amount possible from direct subsidized and unsubsidized loans. This amount of borrowing can create a financially dangerous debt burden that the student will have to pay back upon graduating. This can be especially true if the student’s agreement with their family member is that the expectation is that the student will be expected to pay back the parent plus loan instead of the family member.
  • We strongly advise students that are utilizing parent plus loans to fund their education to schedule an appointment with a CFS Financial Coach. The point of the meeting is to help ensure that a student using parent plus loans are positioned to be able to pay them off after graduation or find other less expensive ways to fund their education.

Repayment Terms

Deferment is when your student loan payments are postponed. Typically, direct subsidized loans and unsubsidized loans are deferred until after sixth months of graduation or when a student drops below half-time in school. This term is used most often for a student loan when the student is still in school.

Forbearance is when payments are temporarily suspended typically due to financial hardship leading to the borrower being unable to make payments. This term is more often used when the student loans are in the repayment phase. In most instances, interest will still accrue during a time of forbearance. If you are in a position where you are not able to make a payment on time make sure you call your student loan servicer and communicate the financial hardship you are experiencing.

Repayment Plans is a straight forward term. Your student loan servicer will provide multiple plan options to repay your student loans. This will include a standard repayment plan, extended repayment plans, graduated and income-based repayment plans. Repayment will be discussed in more depth in part 3.

If you have questions and would like to speak to a trained financial coach about your student loans please visit the WKU Center for Financial Success website and request an appointment at this link https://www.wku.edu/cfs/become-a-client.php.

If you missed part 1 of this series: Where do I start? You can catch up here.

Understanding Credit Reports

Understanding Credit Reports

Credit Report: This is a report that combines all the information reported by businesses and organizations about an individual’s credit activities and current credit situations. The information is a combination of the different credit, loan and payment activities and is compiled into a report. There are three credit bureaus that compile these reports. Not all businesses report to every bureau which causes the reports to sometimes be different.

According to Annualcreditreport.com a credit report may include:

  • A list of businesses that have given you credit or loans
  • The total amount for each loan or credit limit for each credit card
  • How often you paid your credit or loans on time, and the amount you paid
  • Any missed or late payments as well as bad debts
  • A list of businesses that have obtained your credit report within a certain time period
  • Your current and former names, address(es), birthdate, social security number, phone number and/or employers
  • Any bankruptcies or other public record information

The Fair Credit Reporting Act requires that each credit bureau give consumers one free credit report a year. The three credit bureaus are Experian, Equifax, and TransUnion. The credit bureaus provide information to credit score companies such as FICO so that credit scores can be determined.

 The Consumer Financial Protection Bureau and the Federal Trade Commission both provide excellent additional resources on credit reports. The Federal Trade Commission has resources available to aid in reporting items that are on an individual’s credit report in error.

Consumer Financial Protection Bureau: https://www.consumerfinance.gov/ask-cfpb/what-is-a-credit-report-en-309/

Federal Trade Commission: https://www.consumer.ftc.gov/topics/credit-and-loans?sort=subject