Home > Student Loans > 5 Student Loan Terms Every Borrower Should Know

Comments 0 Comments

If you have student loan debt, you’ve probably noticed that your loans have a language all their own – and the last thing you want to do is spend your free time learning it.

The good news is that you don’t need to be fluent in loan lingo in order to navigate the world of education debt – but familiarizing yourself with a few key words and phrases can help you make smarter decisions and potentially save a significant amount of money. In my work at SoFi (a lender that offers student loan refinancing, personal loans and mortgages), I’ve found that there are five key terms that every student loan borrower needs to know.

1. Automatic Clearing House (ACH)

ACH refers to an automatic payment that transfers directly out of your bank account to your lender or loan servicer each month.

Why you should care:

Not only can automatic payments keep you from forgetting to pay your bill (and hurting your credit in the process), but many lenders also offer interest rate discounts for enrolling in an ACH program.

2. Annual Percentage Rate (APR)

This is the annual rate that is charged for borrowing, expressed as an annual percentage. Straight interest rate doesn’t reflect fees or other charges connected to your loan, but APR does. For student loans, the most common of these costs is the origination fee, which some lenders charge for making a loan.

Why you should care:

APR can give you a more apples-to-apples comparison of the cost of different loans, but it doesn’t always tell the whole story. For example, the APR on a federal student loan actually doesn’t include the origination fee (which can be quite substantial for Direct unsubsidized and PLUS loans). That’s why it’s important to do your homework when shopping for loans. Look at interest rate, look at APR and check with the lender to see if there are fees or charges that may not be readily apparent.

3. Consolidation & 4. Refinancing

These terms are sometimes considered synonymous in the student lending world, but it’s important to understand their differences. Consolidation means combining two or more loans into one single loan with a single interest rate and term. Refinancing means taking out a new loan at a lower interest rate and using it to pay off your original loan(s), effectively lowering your overall interest rate.

Why you should care:

Federal loan consolidation is offered by the government and is available for most types of federal loans – but no private student loans are allowed. This option generally doesn’t save you any money, since you’re simply charged the weighted average interest rate of the loans being combined. In fact, if you opt for lower payments when consolidating, this is typically accomplished by lengthening your loan term, which means you’ll pay more in interest over the life of the loan.

When you consolidate student loans with a private lender, you do so through the act of refinancing – which means you’re given a new (hopefully lower) interest rate. By refinancing student loans at a lower interest rate, you can save money on interest and potentially make lower payments. And if you refinance multiple loans together, you also get the benefits of consolidation – namely, fewer monthly bills and payments to keep track.

5. Interest Capitalization

Interest capitalization is accrued interest that is added to your loan’s principal, typically after a period of non-payment such as forbearance.

Why you should care:

If you make your payments on time each month, you’ll keep accrued interest in check. However, after a period of missed or reduced payments (such as forbearance), accrued interest may be capitalized, which can cost you more money in the long run.

Why? Because when interest is capitalized, it increases your loan’s principal. Since interest is charged as a percent of principal, the more often interest is capitalized, the more total interest you’ll pay. This is a good reason to use forbearance only in emergency situations, and end the forbearance period as soon as you’re able to resume regular payments.

Over time, your student loans can have a positive impact on your credit if you consistently pay them on time. Keeping your student loans affordable, by using whatever options best suit you, can be a big part of that. You can track how your student loans are affecting your credit by getting your free credit report summary on Credit.com.

More on Student Loans:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team