5 Student Loan Terms Every Borrower Should Know

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.

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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.

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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.

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