The numbers speak for themselves: 45 million Americans are currently paying off a collective $1.6 trillion in student loan debt.
If you are one of them, and your student loan balance feels like an interminable burden, you’re certainly not alone. 7.29 percent of respondents said they don’t expect to be able to pay off their student loan debt before they die, according to our recent survey of more than 1,000 millennials. And just over half of those surveyed (52 percent) don’t believe their degree is worth the amount they paid in tuition.
The best help we can offer is an understanding of the key terms and vocabulary words for student debt, so that at least when you sign that promissory note, you understand what it is you’re signing up for.
Here is a brief dictionary of important student loan terms to understand while you’re still in college and afterward.
Key terms for high school and college students
- FAFSA: The Free Application for Federal Student Aid is an online form administered by Federal Student Aid, an office of the U.S. Department of Education. College students who wish to receive federal student aid, including grants, work-study, and loans, must complete the FAFSA every year by the deadline, which is June 30th in 2020. However, individual states and schools may have their own FAFSA deadlines. You can find this information online.
- Federal Direct Loan Program: The U.S. Department of Education is your lender. Depending on your eligibility, there are two primary types of Direct Loans: Subsidized (only for undergraduates, tied to financial need, and the government pays the interest on your loan while you’re still in school and for a 6-month grace period afterward), and Unsubsidized (available to all eligible students and you are responsible for paying the accrued interest or letting it capitalize into your loan principal).
- Private Student Loans: These are made by private lenders such as banks, credit unions, and fintech companies like Earnest, SoFi, and others. Rates and terms will vary by lender. Private student loans are not eligible for federal loan repayment and loan forgiveness programs.
Student loan terms for after graduation
- Student Loan Consolidation: If you have more than one federal student loan, you can consolidate them into a Direct Consolidation Loan. Private student loans can also be consolidated into one private student loan. The primary benefit of consolidating your student loans is the ability to make one monthly payment instead of several. You may also be able to receive an overall better interest rate. For example, Direct Consolidation Loans offer a fixed interest rate that is calculated from the weighted average of the existing interest rates on your loan.
- Student Loan Servicer: If you take out federal student loans, the U.S. government is your lender, but once the loans are disbursed, you will be assigned a loan servicer. These are private companies that contract with the U.S. Department of Education to handle the administrative side (billing, customer service, etc.) of the repayment process. With private student loans, your original lender will usually also be the one you make payments to after graduation.
Key terms to understand repayment plans
With private loans, repayment terms are established at the beginning, when your application is approved and the loan is disbursed.
Federal Student Loans have several repayment plans and you can change the plan you’re on at any time for free. There is also no prepayment penalty for paying off your student loan early.
- Standard Repayment: You will have a fixed monthly payment for a 10-year repayment term or a 10-30 year term for a Consolidation Loan. **This will result in the lowest amount paid overall**
- Graduated Repayment: Comes with the same 10-30 year terms, but payments start out lower and then increase over time, hopefully mirroring an increase in the borrower’s income as their career advances.
- Extended Repayment: For borrowers with more than $30,000 in federal student debt, your payments will be fixed or graduated within a 25-year term.
- Income-Sensitive Repayment: Monthly payments are based on annual income but also keep pace to a 15-year term.
Terms for repayment plans with outstanding balance forgiveness
- Pay As You Earn (PAYE): Your monthly payments will be 10 percent of your discretionary income, recalculated every year based on your income and family size. Monthly payments will not exceed what you would have paid under the Standard plan. Outstanding balances are forgiven after 20 years (you may have to pay income tax on the amount forgiven).
- Revised Pay As You Earn (REPAYE): Your monthly payments are recalculated each year to be 10 percent of your discretionary income. If you still have a balance after 20 or 25 years (for undergrad vs graduate or professional loans), it will be forgiven (though you may have to pay income tax on the amount forgiven).
- Income-Based Repayment (IBR): Specifically for borrowers with a high debt-to-income ratio, your monthly payments will either be 10 or 15 percent of your discretionary income, recalculated every year based on your income and family size. Any outstanding balance will be forgiven, and subject to income tax, after 20 or 25 years.
- Income-Contingent Repayment (ICR): Your monthly payment is either 20 percent of your discretionary income or what you would pay on a fixed 12-year term, whichever is lower. This option also comes with outstanding balance forgiveness after 25 years.
Loan forgiveness terms
Both private and federal student loans are nearly impossible to discharge in a bankruptcy filing. However, federal student loans may be forgiven, canceled, or discharged in certain situations.
- Public Service Loan Forgiveness (PSLF): For full-time employees of government and not-for-profit organizations; must make 120 qualifying monthly payments. ***FedLoan is the only servicer who can process PSLF***
- Teacher Loan Forgiveness: Offers up to $17,500 in loan forgiveness for full-time teachers who work for five consecutive years in a low-income school or educational service agency.
- Total and Permanent Disability Discharge: Nelnet is the servicer that processes TPD discharge applications. Borrowers must have a VA disability determination, Social Security Disability Insurance or Supplemental Security Income, or a physician’s certification.
- Death Discharge
- Bankruptcy Discharge (rare): Must prove that your student loan repayment imposes “undue hardship” on you and your family.
- Closed School Discharge: For borrowers whose institution closes while they are enrolled or soon after they leave.
- False Certification Discharge: For borrowers who were defrauded by their school.
Student loans can seem like a no-brainer for millions of college students who otherwise would not be able to cover the cost of tuition, books, and living expenses. However, as our federal loan program has grown, it’s become more complicated, with different loan options, servicers, and repayment plans to understand.
It’s hard to fully understand the implications of taking on student loan debt when you’re 18, 19, etc. and assume that government-sponsored financing for your education must be a benevolent force.
Ultimately, student loan debt doesn’t have to be good or bad, and the tradeoff is still worth it for most degreed individuals who reap higher lifetime earnings. But you have to understand the system before you enter it to avoid turning into a student loan crisis story.