Here’s a not-so-fun fact: 44% of graduates don’t know the difference between federal and private student loans. Understanding your loan and how it works is key to making the best financial decisions for you, and here at Climb we’re dedicated to making sure you really know your loan and your finances as a whole. So, we’ve gathered some common student loan terms you definitely want to be familiar with throughout every part of your student loan process!*
Student loan terms to know before you apply:
Someone (relative, spouse, friend, or anyone!) who signs onto a loan with the main borrower and agrees to make payments if the borrower becomes unable to do so.
The process by which an applicant is either approved or denied for a loan. The factors that are considered vary from lender to lender, but many look at credit score, payment history, and debt-to-income ratio.
On the lender’s side, the process of a loan application. This includes the application’s submission, loan underwriting, processing any documentation you’ve submitted, and sending the loan funds.
The fee lenders charge for processing a loan application. Depending on the lender, this can be paid as an upfront cost, or it can be added to the total amount of the loan and paid back monthly as part of the loan payments. (At Climb, our origination fees are added to the loan and paid back over time).
Your monthly debt payments compared to your monthly income.
The amount that you currently owe out of the original amount you borrowed. If you take out a $10,000 loan, your principal at the beginning will be $10,000. Then, the principal will be reduced as you pay back the original amount you borrowed and the additional interest on the loan!
The amount you are charged to borrow money. This is usually expressed as a percentage of the principal amount you pay over the course of a year, typically in monthly installments.
Annual percentage rate (APR)
The amount you’re charged annually to borrow money. Like interest rate, this is expressed as a percentage, but unlike interest rate, it takes any additional loan fees into account.
Student loan terms to know as you pay back:
Short for Automated Clearing House, setting up ACH on your student loan allows payments to be automatically withdrawn from your bank account each month. Connecting your account for ACH auto-payments not only makes it easier to make payments on time, but often lenders will offer an interest rate reduction as long as ACH is connected!
When a lender sends the funds for a loan.
A company used by the lender to handle payments and billing after a loan is funded.
A temporary reduction or pause in your student loan payments. While these differ in the case of federal student loans, with private student lenders availability and terms vary and interest always accrues during the deferment/forbearance period. You may also need to provide documentation showing your need of assistance.
*These are how these terms are typically used. You should check the specific definitions in any loan documents before you sign them and consult an attorney or other advisor if you aren’t sure what any specific terms means.