Student Loan Terminology 101 Guide
Student loans can be daunting whether you’re brand new to them or have been out of school for years. There’s everything from federal student loans, repayment program, and options to student loan statuses. We know there’s a lot to understand. This list of terms will help educate you on what you need to know about them.
Amended Tax Return
An amended tax return is when you’ve changed your tax return for a particular year. A tax return filed Married Filing Separately can be amended to Married Filing Jointly up to three years after the return has been filed. A tax return filed Married Filing Jointly cannot be amended to Married Filing Separately unless you do so before the filing deadline.
Closed-school discharge is a type of loan discharge. This may occur if your school closes while you’re enrolled or soon after completion. Loan discharge removes your obligation to repay the loan.
Common Law State
A common law state is a tax term that has to do with marriage in a particular state. The majority of states in the US comply under this tax law.
Community Property State
A community property state has unique tax laws that divide up income between spouses differently than common law states. This can be particularly beneficial for borrowers looking to optimize their student loan repayment. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. You can also opt in to community property tax laws in Alaska by setting up a community property trust.
Death and Disability Discharge
If you die or become totally and permanently disabled with federal student loans, you are eligible to have them discharged.
Direct Federal Consolidation
A direct federal consolidation is the process of combining two or more federal student loans into one. The federal government will pay off the existing loans you’d like to consolidate and will issue you a new direct consolidation loan. A direct federal consolidation will take a weighted average of the interest rates of the student loans you include in your consolidation and round it up to the nearest ⅛% (.125%).
A direct federal consolidation can be beneficial to some borrowers.
Direct Federal Student Loans
The most common type of federal student loan. Direct federal student loans were created by the William D. Ford Federal Direct Loan (Direct Loan) Program. These loans are issued directly by the federal government to borrowers. The four types of direct federal student loans are direct Stafford subsidized, direct Stafford unsubsidized, direct consolidated and direct PLUS.
Discharge in Bankruptcy
Discharge in bankruptcy may apply to you with existing federal or private student loans. However, it is extremely rare for a borrower to have their loans discharged in bankruptcy.
Discretionary income is calculated by taking adjusted gross income (AGI) minus the poverty guidelines for your family size and state. It is used when calculating your monthly payment in income-driven repayment plans.
Double consolidation is a strategy employed by parent borrowers who took out Parent Plus loans and are interested in pursuing a loan forgiveness program such as PSLF.
Effective Interest Rate After REPAYE Subsidy is Applied
This is the interest rate a borrower is charged after the interest subsidy in REPAYE is applied.
Example: a borrower owes $171,500 at an interest rate of 7% and is charged $1,000 of interest on their loan each month. Their required monthly payment in REPAYE, an income-driven repayment plan, is $500 per month. Take the difference between interest and payment $1,000 – $500 = $500. There is $500 of unpaid interest for the month. One half of the unpaid interest is covered by an interest subsidy in REPAYE; $250 of the interest is paid with the subsidy. As a result, the borrower is charged less interest for the year. The effective rate is $9,000/$171,500 = 5.249%. So, $9,000 is derived from the annual interest paid of $6,000 (REPAYE payments $50012) plus the $3,000 ($25012) interest subsidy from the government.
False-certification discharge may occur when a college or university falsely certified your eligibility for federal aid.
Family Federal Education Loans
The Federal Family Education Loan (FFEL) Program was a federal loan program that worked with private lenders and banks to provide education loans guaranteed by the federal government. The FFEL Program went defunct in 2010. All loans are now made through the Direct Loan Program. FFEL loans have different rules and requirements than direct loans. FFEL loan types are Stafford subsidized, Stafford unsubsidized, consolidated and PLUS.
Federal Student Loan
A federal student loan is issued directly by the federal government to cover the cost of attendance. Undergraduate students have caps on how much they can borrow. At the graduate level, the cap is much higher, and specific health professionals like doctors or dentists have no cap on how much they can borrow.
Forbearance is a temporary period of time where you don’t have to make payments. There are two main types of forbearance: general forbearance and mandatory forbearance.
General forbearance is when you are temporarily unable to make payments due to financial hardship, medical expenses, or changes in employment. You may not enter this forbearance for more than 12 months consecutively and no more than 36 months in cumulative.
Mandatory forbearance may be granted for those in the armed forces, a training program such as residency, or if your monthly payment is 20% or more of your total monthly gross income.
If you stop making payments without a forbearance, your loans will become delinquent and may go into default.
Form 1098-T (Tax Form)
Form 1098-T is a tax form that allows you to claim a student loan interest deduction. On this form, student loan interest received by the lender is reported. This is reported as an “above the line” deduction. In order to be eligible for this deduction:
You must have paid interest during the tax year
You must have a modified adjusted gross income (MAGI) < $80,000 ($160,000 MFJ)
You are not a dependent of anyone else
You cannot include any amount paid from a 529 account
The maximum amount of interest deductible per year is $2,000.
Free Application for Federal Student Aid (FASFA)
Free application for federal student aid, or FASFA, is the widely known application you need to fill out to qualify for financial aid. This is to be completed each year you need financial aid to cover tuition, books, living expenditures, etc.
A grace period is typically a six-month period of time which occurs immediately after graduation. Wherein, no payments are required on your student loans. It can also occur if you drop below half-time enrollment.
Graduate PLUS Loans
These are part of the PLUS loan family and are currently only issued as a direct federal student loan at the graduate level. There used to be FFEL PLUS loans as well. Graduate PLUS loans are issued at a higher interest rate—1% higher than Direct Stafford loans.
Health Resources and Services Administration (HRSA) Loan Repayment Assistance Program
HRSA loan repayment assistance program (LRAP) is a method to help pay down your student loans that requires employment in rural and underserved communities. Most of these benefits are accessed through the National Health and Services Corps (NHSC). NHSC will offer LRAP up to $50,000 for a two-year service commitment.
Income Driven Repayment Plan Request
An income driven repayment plan request or IDR form is a form required by borrowers in or who are interested in income-driven repayment plans (IDR). This form is to be completed once per year. Aside from annual recertification, this form allows you to enroll into an IDR plan and switch repayment plans.
Income Driven Repayment
An income driven repayment (IDR) plan is a federal student loan repayment program. Payments in an IDR plan are generally based on your income. IDR plans are popular for borrowers interested in federal forgiveness programs.
Institutional Student Loans
Institutional student loans are private student loans offered by a borrower’s school. Repayment terms vary by institution.
Interest capitalization is when interest is added to your loan’s principal balance. It is the concept of interest accruing on interest. This typically occurs when you enter repayment, exit a forbearance, or private refinance your student loans.
Loan forgiveness occurs when all or a part of your student loan balance is eliminated. Loan forgiveness is sometimes taxable to the borrower as income.
Loan discharge is the removal of your obligation to repay your federal student loan. This may occur if your school closes down while enrolled, if you die or are permanently disabled, go bankrupt (rare cases), or if someone steals your identity and takes out loans or your behalf.
Loan Repayment Assistance Programs
Loan Repayment Assistance Programs (LRAPs) are offered to borrowers to help pay down all or a portion of their student loans. LRAPs are accessed through a variety or sources such as schools, states, employers, etc.
Military Loan Repayment Assistance
Military Loan Repayment Assistance is a LRAP specific to borrowers who join the military. These can be offered up front when you are borrowing student loans or after you graduate. The amount of loan repayment varies by program. Each military repayment assistance program requires years of service. If you break the commitment, you’ll often have to repay back any loan repayment incentive.
National Health Services Corp Loan Repayment
National Health Services Corp (NHSC) loan repayment is offered as an incentive to borrowers who work with underserved or rural communities. You are eligible to receive up to $50,000 of loan repayment assistance for two years of service at a qualifying employer.
National Institute of Health Loan Repayment
National Institute of Health (NIH) loan repayment is a set of programs designed to recruit health professionals into research. NIH will pay up to $50,000 a year in educational debt. The program usually requires 1-2 years of employment.
National Student Loan Data System (NSLDS)
The National Student Loan Data System is a data file on studentaid.gov maintained by the US Department of Education to keep track of student loan records. The file is in a weird format but contains the most comprehensive information on your payments, loan disbursements, PSLF credits, forbearances, etc.
Negative amortization occurs when interest charged monthly is more than your monthly payment. This frequently happens to new graduates in IDR plans.
Parent PLUS Loans
Parent PLUS loans are federal student loans issued to parents on behalf of their child attending college. Parent Plus loans have less repayment options than direct federal student loans.
Partial Financial Hardship
A partial financial hardship is if your IDR payment is lower than the standard 10-year repayment plan. There are a number of IDR plans that require you to have a partial financial hardship to enroll into them.
Perkins loans were federal student loans issued to borrowers with low income or an exceptional financial need. The federal Perkins student loan program ended on September 30, 2017.
Poverty guidelines are set by the Department of Health and Human Services. They are used by your loan servicer to calculate your discretionary income and monthly student loan payment.
A private refinance is when you have a private bank or lender pay off an existing student loan. This could be federal, private, or a combination of both.
Private Student Loan
A private student loan is a student loan issued by a private bank or lender. These loans typically have less protections and flexibility than federal student loans.
Public Service Loan Forgiveness
Public Service Loan Forgiveness (PSLF) is a federal student loan forgiveness program available to public servants. To receive PSLF, a borrower must make 120 on-time qualifying monthly payments. At that time, the borrower’s loan balance is forgiven tax-free.
PSLF has five rules:
- Full-time employment, at least 30 hours per week
- Employment at a nonprofit organization
- Qualifying repayment plan
- Qualifying federal student loans
- PSLF certification form
Public Service Loan Forgiveness (PSLF) Certification Form
The Public Service Loan Forgiveness certification form documents your employment and gives you credit toward PSLF. Although not required annually, it is highly recommended to complete this each year. There is also a PSLF help tool which can help you fill out the form.
Public Service Loan Forgiveness Reconsideration (PSLF) Application
The PSLF reconsideration application was created to help borrowers who’d like their loan servicer to go over their PSLF application again. The application can be submitted for a variety of reasons, but a common complaint is the PSLF loan servicer not counting all qualifying payments a borrower has made.
REPAYE Interest Subsidy
The REPAYE interest subsidy helps to cover one half of the interest while in negative amortization.
Student Loan Default
A student loan default is when a borrower has been delinquent on their federal student loan for a minimum of 270 days. A loan in default will hurt a borrower’s credit and pause progress toward federal forgiveness programs. To exit a student loan default, you can complete a direct federal consolidation, loan rehabilitation, pay off the loan, or have your loan discharged.
Student Loan Delinquency
A student loan delinquency is when you miss a payment. The loan will remain delinquent until payment is made or if you request a deferment or forbearance. If loans stay delinquent for 270 days, your loans will move into student loan default.
Student Loan Interest Rate
The student loan interest rate is the interest rate quoted by federal or private student loan lenders. Private student loan interest rates follow the LIBOR or Secured Overnight Financing Rate (SOFR). Federal student loans follow the 10-year treasury note auction which is set each May.
Student Loan Ombudsman
The Student Loan Ombudsman is a group that advocates for federal student loan borrowers. It will resolve complaints on federal student loans when a borrower believes a servicer or the Department of Education has made a mistake on their loans.
Student Loan Servicer
A student loan servicer oversees the administration of your student loans. Your servicer will keep track of your monthly payments, forgiveness credits, late payments, applicable tax forms, payment history, etc.
A superseding return is a tax return that is filed subsequent to the originally filed return before the due date.
Taxable Loan Forgiveness
Taxable Student Loan Forgiveness is a federal student loan forgiveness program for borrowers on IDR plans. Taxable forgiveness takes effect after a borrower has made 20-25 years of payments in an IDR plan. At the time of forgiveness, the loan balance outstanding (principal and interest) is forgiven and taxed at the borrower’s tax rate. Unlike PSLF, there is no specific employment requirement.
Teacher Loan Forgiveness
Teacher Loan Forgiveness is a forgiveness program eligible to teachers who work at a qualifying school (usually low income or an education service agency). Teachers can receive up to $17,500 of loan forgiveness.
Unpaid Refund Discharge
Unpaid refund discharge may occur if a borrower withdrew from school after receiving a direct or FFEL student loan and the school failed to return some or all of the money received to the loan servicer. You may be eligible for discharge on the portion that the school failed to return.