Main content
Course: Personal finance > Unit 9
Lesson 5: Loans- Benefits and drawbacks of college loans
- Types of college loans
- Managing your debt level
- Paying back your loans
- How loan deferment works
- Public Service Loan Forgiveness: a path out of student debt
- Terms to know when you repay student loans
- Consolidating student loans
- Real life talk about student loans
© 2024 Khan AcademyTerms of usePrivacy PolicyCookie Notice
Terms to know when you repay student loans
Let's get a handle on vocabulary, student loan-style.
Paying off student loans can be a challenge, and loan statements full of unfamiliar vocabulary can make the process seem intimidating. Understanding the terminology can help you get a better handle on your options.
1. Grace period
A grace period is a set period of time (usually 6 months) after you leave school (or stop attending below half-time enrollment) before you have to begin repaying your loan. The length of the grace period differs depending on the type of loan, and some loans may have no grace period at all.
2. Loan servicer
You probably know the name of the banks that issued your loans, but when it comes time to pay them off, you’ll likely be dealing with loan servicers. These companies administer loans during repayment. If you need to modify the terms of your loan—for example, if your life circumstances change—you can reach out to the loan servicer for information and advice. Keep in mind that the servicer may change during the term of your repayment, so you may end up dealing with multiple servicers. If you encounter problems with your loan servicer—for example, if they are unresponsive—you may file a complaint related to your federal student loans with the U.S. Department of Education or your private student loans with the Consumer Financial Protection Bureau.
3. Income-driven repayment
If you’re having a hard time repaying your federal student loans, you may qualify for income-driven repayment. These plans link your monthly payment to your income: You’ll pay between 10–20 percent of your discretionary income. This can be a good option for those with a limited salary who want to make student loans a smaller piece of their budget. Extending your repayment period generally means
you’ll pay more in interest over the long term.
4. Extended repayment
An extended repayment plan enables you to stretch out the repayment period on Direct or FFEL federal student loans up to 25 years if the sum of your Direct loans or FFEL loans (not the two combined) exceeds $30,000. This can be a viable alternative for those with a lot of student loan debt who do not qualify for an income-driven repayment plan. Keep in mind that, like with income-driven repayment, the extended repayment period will likely lead to higher total interest.
5. Consolidation
Consolidation refers to the practice of merging multiple outstanding loans into one new loan. Although student loan consolidation typically doesn’t lead to a lower interest rate, it can simplify your finances by making you responsible for one regular payment instead of multiple. It can also lower your monthly payments by extending the repayment term up to 30 years. This may then open the door to a more gradual and manageable payment schedule. One consideration: Combining loans could cause you to lose interest rate discounts or other benefits associated with the original loans.
6. Deferment
Deferment is a temporary suspension of your loan payments. While the repayment of principal is always suspended in deferment, interest may still accrue, so you may want to make interest payments even though they’re not required. Generally speaking, you must apply and qualify for deferment. Qualifications may include unemployment, active duty military service or full-time enrollment in a postsecondary school, among others. More information about deferment qualifications can be found on the Department of Education website.
7. Forbearance
If you are having a hard time making student loan payments and do not qualify for a deferment, you can apply for forbearance with your loan servicer. Forbearance can allow you to stop or reduce your monthly payments for up to a year. Keep in mind that interest will continue to accrue during that time. Under certain circumstances, the servicer is required to grant you forbearance—for example, if you are in a medical or dental internship and you meet specific requirements or you are performing teaching services and would qualify for teacher loan forgiveness. Under other circumstances (for example, financial hardship or illness), your lender will determine whether discretionary forbearance can be applied.
8. Delinquency and default
If you fail to make your student loan payments on time, your loan generally becomes delinquent. After 30 days past due, your loan servicers can report a delinquency to the major credit bureaus, which can affect your credit score. If you are excessively delinquent (generally 120 days past due on a private student loan or 270 days past due on a federal student loan), your loan may go into default. If your loan defaults, you will be asked to pay the entire unpaid balance, plus any accumulated fees, immediately. For federal student loans, the government can take a variety of measures to collect overdue loans, such as seizing tax refunds or garnishing your wages.
9. Credit score
Your credit score is a rating that indicates your creditworthiness, which represents the likelihood that you will repay loans and other bills on time. In the eyes of a lender, a high credit score indicates that a borrower will be more likely to make loan payments fully and on time. Because your student loan payment history is usually reported to the major credit bureaus, paying your loans on time can
potentially help you build a better credit score.
The material provided on this website is for informational use only and is not intended for financial or investment advice. Khan Academy assumes no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.
Khan Academy doesn’t provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Want to join the conversation?
- No question for this article(3 votes)
- what are we suppose to do for this assignment(1 vote)
- I already learned some of these terms in the video I just watched on the same topic. But, this is a very helpful section in Kahn learning. I learned the most I have ever learned about loans and I feel prepared to help people learn the basics of loans as well. Thank you!(1 vote)
- the conditions for deferment and forbearance seem quite similar, what makes one not qualified for deferment but qualified for forbearance?(1 vote)
- No questions on this article(0 votes)
- What am i supposed
to do know that i have participated in the videos?(0 votes) - How do you save money for emergencies and money for bills, like student loans? How do you manage the amount to spend and save?(0 votes)