Understanding student loans requires learning a new vocabulary, sprinkled with acronyms such as FAFSA, EFC and SAR.
Here's a primer on some of the terms students and parents encounter:
Bankruptcy: Student loan debt is harder to discharge in bankruptcy court than other consumer debt. For federal and private student loans, borrowers must prove "undue hardship."
Cancellation of loan: Cancellation releases the borrower from any requirement to repay all or part the loan. A federal student loan can be cancel ed: or forgiven: if the borrower takes certain jobs, such as nursing. The exact circumstances vary by type of loan.
Consolidation loan: See federal loans.
Cost of attendance: Financial aid typically is limited to the cost of attendance. This figure includes tuition and fees, on-campus room and board (or an off-campus allowance), books, supplies, loan fees and some other miscellaneous and personal expenses.
Default : Failing to pay a federal loan can have consequences, including a lowered credit rating, withholding of federal income tax refunds, deductions from the borrower's paycheck and legal actions. Federal Family Education Loan Program and Direct Loan program participants with monthly payments are in default if they don't make a payment for 270 days.
Deferment: Federal student loan payments can be delayed in certain cases, including enrollment in school for at least half-time, inability to find full-time work for up to three years and economic hardship for up to three years. Interest doesn't accrue during this period for a subsidized Stafford loan, but it does for an unsubsidized one. Payment deferments also are possible for PLUS loans for graduate and professional-degree students although their interest continues to build.
Active military deferments for up to three years are available in certain circumstances, such as serving in a military operation or national emergency.
Direct Loan: This is also called the William D. Ford Federal Direct Student Loan Program. Borrowers receive money directly from the U.S. Department of Education at participating schools. There are Direct Stafford Loans, Direct PLUS Loans and Direct Consolidation Loans.
Direct Loan Income-Contingent Repayment Plan: Monthly payments for federal direct loans can be based on income, with no minimum for low-income borrowers. After 25 years, any remaining debt is forgiven and taxed as income.
Discharge of loan : Available in limited circumstances, a discharge releases the borrower from any requirement to repay all or part of the loan. Loans can be discharged because of school closure, false certification or the death or total and permanent disability of the student.
Eligibility : Federal student aid is available to U.S. citizens, U.S. nationals and U.S. permanent residents with an I-151, I-551 or I-551C card. Other noncitizens who may qualify include those who entered the U.S. as refugees, victims of human trafficking and some other special circumstances. Applicants who have received drug convictions while receiving federal student aid are ineligible for federal aid for a period of time.
Expected Family Contribution: The financial information parents and students enter on the Free Application for Federal Student Aid form, known as FAFSA, is used to compute the Expected Family Contribution, known as EFC. This is used to determine the amount of money a family is expected to contribute to a student's education.
FAFSA: See Free Application for Federal Student Aid.
Federal Family Education Loan Program: Known as the FFEL Program, it uses funds provided by private lenders but guaranteed by the federal government. The loans are repaid to the private lender. There are FFEL Stafford Loans, FFEL PLUS Loans and FFEL Consolidation Loans.
Federal loans: Some of the best loan rates are available through federal student loans. The best deals are for low-income students, but students of all income levels can qualify for some federal loans.
- Perkins Loans: Available through participating schools to full- and part-time undergraduate, graduate and professional students who have the greatest financial need. Priority is given to those eligible for federal Pell grants. A maximum of up to $4,000 a year for undergraduates and $6,000 a year for graduate students is available at a 5 percent interest rate.
- Stafford Loans: Available to undergraduate, graduate and professional students who are at least half-time. Financial need is not required. However, those with financial need can qualify for subsidized Stafford Loans, in which the federal government pays the interest while the student is in school.
The rate for subsidized loans will drop to 6 percent for the coming school year and gradually to 3.4 percent by July 1, 2011.
The amounts vary by grade level and whether a student is a dependent or independent. Dependent undergraduates have a lifetime limit of $23,000.
- PLUS Loans: Loans to parents or dependent undergraduate students whose parent is denied a PLUS Loan or to graduate and professional degree students. Subject to a credit rating review, borrowers can borrow as much as the cost of attendance, less any other financial aid the student receives.
For loans taken out after July 1, 2006, the maximum interest rate is 7.9 percent through the direct loan program or 8.5 percent for those through the FFEL program.
Interest begins accumulating as soon as the first disbursement is made. Parent loans require them to begin repaying principal and interest while the student is in school. Students can seek deferments.
- Consolidation loan: This combines multiple federal student loans into one loan: either the Direct or FFEL Program: with a single monthly payment. It can provide a longer repayment period.
FFEL Program: See Federal Family Education Loan Program.
FFEL Income-Sensitive Repayment Plans : Federal loan payments sometimes are based on the expected total monthly gross income. For FFEL loans, monthly payments must be at least as large as the accruing interest.
Financial aid package: This is the total amount of money that a school offers a student. It may include federal, state, institutional and other money. The grant portion does not have to be paid back, but the loan portion does.
Financial need: The federal formula takes the cost of attendance and subtracts the Expected Family Contribution, as determined by the FAFSA. If the cost of attendance is greater than the EFC, then there is financial need. If the cost of attendance is less than the EFC, there is no financial need. Students do not have to have financial need to be eligible for unsubsidized federal Stafford Loans.
Forbearance: When a federal student loan borrower is ineligible for a deferment, lenders can agree to temporarily reduce or postpone student loan payments for periods of up to 12 months at a time, for as long as three years. Interest continues to accumulate on all types of federal loans.
Forbearance is by application, but lenders are required to grant it to students who are in a medical or dental internship or residency, have student loan payments that are at least 20 percent of their monthly income or have payments being made for them by the U.S. Department of Defense.
Free Application for Federal Student Aid : This form, known as FAFSA, is vital for most financial aid awards at career schools, two- and four-year colleges, and universities. All types of federal student aid: including loans: require this application, which can be filed online at www.fafsa.ed.gov . Deadlines vary by financial aid program and school, but applications should be filed as soon as possible after Jan. 1.
Grace period: Payments on Stafford and Perkins loans do not have to begin until six or nine months, respectively, after the student has graduated, left school or fallen below half-time status. A grace period of up to three years can be provided during active military duty.
Pennsylvania Higher Education Assistance Agency: Known as PHEAA, this state agency administers financial aid programs, including student loans and state grants. PHEAA's loans programs are part of its national arm, American Education Services or AES.
Perkins Loans: See federal loans
PHEAA: See Pennsylvania Higher Education Assistance Agency.
PLUS Loans: See federal loans.
Private loans: These are made by lenders without using any federal loan programs. Also known as alternative loans, private loans do not have the same guaranteed rights: such as deferment, forbearance, cancellation and income-based repayments: as federal loans do.
Rehabilitation: This is a way to get out of default for federal student loans. The rules vary by loan, but for FFEL or direct loans, borrowers have to make nine monthly payments within 20 days of the due date for 10 consecutive months. The default then can be removed from the credit record, and the borrower is eligible for new loans and grants. Rehabilitation must be requested.
Repayment plans: Several federal loan repayment options are available, depending on the type and amount of loan. A standard repayment plan provides for repaying the loan in five to 10 years. A graduated plan has payments that start low and increase over time. An extended repayment plan can run up to 25 years.
Sallie Mae: A for-profit firm that is the nation's largest student lender. Its formal name is SLM Corp.
SAR: See Student Aid Report
Satisfactory academic progress: Students can receive federal financial aid, including loans, only if they are making satisfactory academic progress toward a degree or certificate offered by that institution. The specifics can vary by school, but four-year colleges often require a student to complete 24 new credits a year.
Stafford Loans: See federal loans.
Statute of limitations: There is no statute of limitations on collecting federal student loans.
Student Aid Report: Once the Free Application for Federal Student Aid has been processed, the student will receive a Student Aid Report, known as SAR, which will include included the Expected Family Contribution, known as EFC. This is used for determining a student's eligibility for various types of federal student aid.
Education writer Eleanor Chute can be reached at firstname.lastname@example.org or 412-263-1955.