11 Terms You Need to Know Before Repaying Student Loans

As part of providing a well-rounded education, many colleges require students to study a foreign language. And while a semester of Spanish may come in handy while backpacking around Europe, it won't help you decipher the toughest dialect you'll face after school -- the language of student loans.

Financial aid comes with its own vocabulary, and not knowing some of its definitions could cost you -- literally. To prevent that, learn these 11 terms before you enter repayment.

1. Capitalization: Capitalization is when your loan holder adds unpaid interest to the principal balance of your loan. This increases the overall amount you owe now and in the future, as you begin paying interest on that larger balance.

Capitalization happens whenever you enter repayment -- or for federal student loans, at the end of a grace, deferment or forbearance period -- as well as when you consolidate a loan or it goes into default.

2. Consolidation: Consolidation is a repayment option that replaces borrowers' existing debt with a single, new loan. Consolidation can make repayment easier by cutting down the number of loans borrowers have.

However, consolidation loans can also cost you any special benefits your previous loans had, such as Perkins loan forgiveness. Before consolidating, consider all the pros and cons.

[Learn what you should know about your student loan report.]

3. Deferment, forbearance: Both are options to pause your loan payments temporarily. However, there are big differences between the two.

Deferment is a borrower's right. If you meet the eligibility criteria, you cannot be denied a deferment. In addition, for subsidized loans, you're not responsible for the interest that accrues during an approved deferment period.

Forbearance is granted at your lender's discretion. Interest accrues on all loans during forbearance, so the amount you owe always increases. If you need to postpone your payments, be sure to ask for deferment first.

4. Delinquency, default: This is another pair of related terms that borrowers often confuse.

Loans enter a delinquency status if they're past due by even a single payment. Federal student loans usually default after 270 days of delinquency, if you are required to make monthly payments.

Neither is good and both will damage your credit score, but trust us, you'll know when your loan switches from delinquent to default. If the mailed notices don't tip you off, the penalties -- which can include garnishment of your paychecks and tax refunds or Social Security payments-- definitely will.

5. Forgiveness: There are ways to have your student loan debt erased, and this is known as forgiveness.

Your home state may have programs to forgive your loans, likely depending on your profession. At a federal level, the main options are Teacher Loan Forgiveness and Public Service Loan Forgiveness. Check out our e-book to learn more about these and other options to get rid of your debt.

[Find ways to get out of student loan debt without paying for it.]

6. Grace period: A grace period is the amount of time you have before your first payment is officially due.

While most federal student loans come with a six-month grace period, the actual amount of time you receive can vary greatly depending on the type of loan you have. There is a common misconception that the grace period starts when you graduate, but it actually starts when you drop below half-time enrollment. This is just one of many little-known facts about student loan grace periods.

7. Pay As You Earn: Federal student loans offer many different options to make payments more manageable. Pay As You Earn is the newest, and it ties loan payments to a borrower's income.

This plan allows eligible borrowers to make payments of no more than 10 percent of their discretionary income. Under this plan, after 20 years of qualified, on-time payments -- or 10 years, if you work at an eligible public service organization -- any remaining outstanding balance on your federal student loans may be forgiven.

8. Promissory note: This is your loan's contract. If you need answers about your repayment options or rights as a borrower, look in your promissory note.

9. Rehabilitation: Should your loan enter default, rehabilitation is one option you have to return it to good standing. You can also consolidate out of default or pay the debt in full.

In rehabilitation, you work with your loan holder and make nine on-time, voluntary payments in an agreed-upon amount. After that, your loan goes to a new holder and a new servicer and the default line gets removed from your credit history. You can rehab each loan only once, so it's important to stay on track once this process is complete.

[Learn the facts about struggling student loan borrowers.]

10. Subsidized: Subsidized loans are ones that the government pays the interest on while you're in school and during approved deferment periods. In addition, they will pay this interest during your grace period if you borrowed these loans before July 1, 2012.

Perkins loans are always subsidized, but Stafford loans can be either subsidized or unsubsidized. Whether your loans are subsidized will go a long way to determining how much you owe when you enter repayment.

11. Servicer: A servicer is the organization that sends you student loan bills and collects your payments. They are not your lender. Your lender, which is the federal government for all federal education loans issued since July 2010, hired them to provide you with customer service. They're also not the same as collection agencies.

If you have questions about your loans or need to submit loan paperwork, you will likely need to contact your servicer. However, if you just want to learn more student loan vocabulary, visit this student loan glossary.

Ryan Lane is the senior editor for American Student Assistance, where he oversees the financial website saltmoney.org and serves as the editor of the SALT Blog. He graduated from Syracuse University with a B.S. in journalism.