Federal Student Loan Lingo 101: A Simple Guide to Must-Know Terms
When you’re just starting out, student loan terms can sound like a foreign language. Between FAFSA, forbearance, disbursement and deferment, it’s no wonder students feel overwhelmed.
But you don’t have to learn everything at once. By understanding a few key terms, you’ll gradually build financial knowledge that can help you make smart decisions well beyond graduation.
In this guide, we’ll break down must-know terms by life milestone to help you feel more confident every step of the way.
Milestone 1: Taking Out a Student Loan—The Basics
Who’s Involved?
Borrower: An individual who completes a loan application agreeing to certain terms and conditions and is obligated to repay the debt, even if the loan was taken out on someone else's behalf, as in the case of a parent borrowing a PLUS loan to pay for a dependent student's education.
Lender: The financial institution that provides the funding for student loans. For federal loans, it’s the Department of Education. For private loans, it could be a bank, credit union or a state-based, nonprofit organization like the Higher Education Servicing Corporation (HESC).
What is a Student Loan?
It’s money you borrow to pay for college expenses like tuition, housing, books and more. But remember—it must be paid back with interest.
The Promissory Note
Before receiving funds, you’ll sign a Promissory Note—a binding legal agreement outlining rights and responsibilities as well as:
Principal: The original amount you borrow.
Interest Rate: The percentage at which interest is calculated on your loan(s). Rates may be fixed, which means it stays the same over the life of the loan, or it can be variable, meaning it can change over time.
Loan Term: The length of time between the date of disbursement of the loan and the date it is expected to be fully repaid—typically 10 to 30 years.
Pro Tip: A student loan is a legal contract and a major commitment. Always read it carefully, ask questions before signing, and keep your promissory note in a safe place.
Milestone 2: While You’re in School
Entrance Counseling
Before your first federal loan disbursement, you’ll complete entrance counseling to learn your rights and responsibilities for taking out the student loan. When you graduate or leave school, you’ll also complete an exit counseling session. For private loans, check with your school’s financial aid office as some may offer their own versions of entrance/exit counseling.
Loan Servicer vs. Loan Holder
Loan Servicer: The organization contracted by a lender or loan holder to provide day-to-day processing repayment services for the student loan program.
Loan Holder: The institution that holds the title to a loan and therefore has a right to collect on that loan.
Disbursement
A student loan has been disbursed when your lender sends money to your school. A single loan may have multiple disbursements, for example one payment for fall and one payment for spring.
Milestone 3: Graduation or Dropping Below Half-Time
Loan Status
After you graduate or drop below half-time enrollment, your loan status will change. Be sure to stay in communication with your loan servicer to understand when repayment of your loan(s) begins and your options to postpone payments, if necessary.
Key terminology:
Grace Period: A set time after you graduate or drop below half-time (usually 6 months) when you don’t have to make payments on your loan(s).
Repayment: When you start making monthly payments.
Deferment: A temporary pause on payments. Subsidized federal student loans do not accrue interest during deferment, but interest does accrue for unsubsidized and private loans. Learn more about Student Loan Deferment.
Forbearance: Another payment pause option, usually granted during financial hardship. Interest accrues during this time. Read our blog “Forbearance on Student Loans: What You Need to Know” to learn more about this option for short-term relief if you run into trouble paying back your loans.
Milestone 4: Repayment
When your loan enters repayment, you’ll work with your loan servicer to choose a repayment plan. Understanding your options can save you stress––and money.
Standard Repayment Plan: Fixed monthly payments over 10 years. Good for borrowers who want to pay off loans quickly.
Graduated Repayment Plan: Payments start lower and increase every two years. Great if you expect your income to grow.
Income-Driven Repayment Plans (IDR): Payments are based on your income and family size. Some plans offer forgiveness after a certain number of years in repayment.
What Happens if You Don’t Make Your Loan Payments?
Even if you’re doing your best, life happens. Here are the basics about some possibilities to avoid if you hit a financial rough patch.
Delinquency: Paying bills on time consistently is one of the key factors considered in your credit report. Late payments may be reported to credit bureaus and affect your credit score.
Default: If you don’t make payments for an extended period, your loan goes into default. This can hurt your credit score, limit your eligibility for future federal aid and impact your borrowing power for future purchases such as car loans and mortgages.
Could You Qualify for Forgiveness?
Loan Forgiveness
As you map out your education, consider pursuing one of these high-demand career paths. Some programs forgive part or all of your student loans if you meet specific criteria, potentially saving you thousands of dollars. These include:
Public Service Loan Forgiveness (PSLF)
Teacher Loan Forgiveness
Military or Nonprofit Service
Lingo to Last a Lifetime
Understanding student loan terminology isn’t just for financial aid pros, it’s for you.
Whether you’re just now applying for aid or entering repayment, every step of the student loan process is easier when you speak the language.
Start with the basics, ask questions and don’t hesitate to lean on trusted resources like your school’s financial aid office or organizations like HESC.
Need help with other tricky finance terms? Check out our Financial Aid Glossary for clear, quick definitions you can trust.