Posted on: January 11, 2023
The financial problems created by the pandemic led to passing of the CARES Act, which provides temporary relief from federal student loan repayment. The pause in federal student loan repayment has been extended multiple times. In the meantime, borrowers of private student education loans continue to be required to make their regular payments.
Jargon and confusing terminology associated with loans can make it hard to navigate student loan repayment. This overview of important student loan debt terms can help borrowers understand whether making payments now is right for them.
1. Annual percentage rate (APR)
This is the annual percentage rate for a borrower’s student loan, including any fees and interest. Most federal loans have a fixed interest rate – the amount the borrower will pay during the life of the loan. Private loans could offer a fixed rate or a variable interest rate that can change and affect the monthly debt payment.
Borrowers will often receive a discount on the interest rate of their loan – usually 0.24% or more – if they let the loan serving company withdraw directly from their bank account for the monthly payment.
If a borrower stops making payments on their loan without approval from the federal government or servicing company, the unpaid interest could be added to the principal balance. The borrower will pay interest on this new amount going forward.
Borrowers with several student loans can have them consolidated into one payment through the Department of Education. The interest rate will be the same, but there will be one monthly payment versus two or three, making it easier not to miss a payment.
5. Deferment and forbearance
Borrowers who cannot presently make their monthly loan payment, but can resume making payments soon, can ask their loan serving company for permission to delay making payments with either a deferment or forbearance (usually for up to 12 months). Borrowers typically have to show evidence of financial hardship to receive relief. In some cases, student loans in deferment do not accrue interest while those in forbearance do. If additional time is needed, ask the loan servicing company about an income-driven payment plan.
6. Delinquency and default
If a borrower is late making federal or private student loan payments, their loans become delinquent. When a borrower doesn’t make a payment on a federal student loan for 270 days, or a private student loan for 120 days, the loan defaults. The loan serving company can sue, garnish wages, or seize tax refunds to recover the debt. Borrowers who cannot make their monthly payment should immediately contact the loan serving company to work out a plan so that their loans don’t default.
7. Employer-assisted student loan repayment
Signed into law as part of 2020’s pandemic relief efforts, the Consolidated Appropriations Act expanded Section 127 of the IRS code to allow employers to offer up to $5,250 in student loan repayment benefits for each employee, tax-free. The number of companies offering the benefit is small but growing, so employees should be aware of their employers’ benefits. Employees can use this calculator to estimate how much time and money they can shave off their student loan repayment by taking advantage of an employer’s student loan repayment program.
8. Employer match of student loan payments
With more employees struggling to save for retirement while they continue to make student loan payments, Congress recently passed SECURE Act 2.0. This will allow employers to provide their employees with 401(k) contribution matches based on their employees’ qualifying student loan payments starting in 2024. Participating in this option will allow employees to start seeing their retirement accounts grow with employer match dollars even if they’re unable to contribute to their 401(k) because of their student loan payments.
9. Grace period
After federal student loan borrowers graduate, leave school or take less than half the normal enrollment load, they receive a grace period before they need to make monthly payments. Borrowers with private loans may not have this same benefit. Making payments during the grace period helps avoid interest capitalization.
10. Loan forgiveness
Borrowers who qualify for the Department of Education’s loan forgiveness program could receive part, or full, relief of continued loan payments. While the one-time federal student loan forgiveness proposed as part of the Biden-Harris student debt relief plan has been blocked, borrowers can learn more about available debt forgiveness programs in this Forbes article to see if they qualify.
Editor’s Note: This post was originally published in September 2020 and has been updated for freshness, accuracy, and comprehensiveness.