Understanding Student Loans: 13 Terms Students Should Know

If you apply for financial aid, you may be offered loans as part of your school’s financial aid offer. A loan is a money you borrow and must pay back with interest. Understanding the differences between each of the existing student loans will be very helpful for you in making wise decisions.

Student Loans
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If you decide to take out a loan, make sure you understand who is making the loan and the terms and conditions of the loan. Student loans can come from the federal government, from private sources such as a bank or financial institution, or other organizations.

Below, you can learn more about the different types of student loans for colleges.

Student Loans

A student loan is money borrowed from the government or a private lender to pay for college. The loan has to be paid back later, along with the interest that builds up over time. The money can usually be used for tuition, room and board, books, or other fees.

How do student loans work?

People get federal student loans by filling out the Free Application for Federal Student Aid (FAFSA). Then, students and their parents share their financial information on the form, which is then sent to the student’s schools of choice.

Next, the financial aid office at each school crunches some numbers to figure out how much (if any) aid the student qualifies for, and then sends them an “award letter” with all the details about their financial aid offer.

Regarding student loans, there are several other terms that students should know. This will make it easier for them, especially in the application procedure.

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1. Student Loan Interest

Like almost all loans, student loans charge interest. But how does student loan interest work?

Interest is the amount of money due to a lender for providing funds. It’s typically expressed as an annual percentage of the loan balance. Furthermore, the interest a borrower pays may be simple or compounded.

Simple interest is charged based on the principal balance of a loan (the amount you originally borrowed). On the other hand, compound interest is charged based on the overall loan balance, including both principal and accrued but unpaid interest (interest charged to the loan and not yet paid).

Nevertheless, student loan interest can vary based on if your loan is a subsidized loan or unsubsidized loan, a federal loan, or a private loan.

2. Student Loan Relief

Student loan relief is a release from having to repay federal student loans, in full or in part, that have been borrowed to pay for post-secondary education. However, only federal direct loans qualify for loan forgiveness. Thus, you can’t get it for private loans.

Student loan relief can be earned in two main ways: by working in public service or by making payments through an income-contingent payment plan for a (long) period of time.

3. Student Loan Forgiveness

According to Federal Student Aid, forgiveness means that you are no longer required to repay some or all of your loan. Yet, it’s important to remember that outside of the circumstances that may qualify you to have your loans forgiven, you remain responsible for repaying your loan—whether or not you complete your education, find a job related to your program of study, or are happy with the education you paid for with your loan.

Also, even if you were a minor (under the age of 18) when you signed your promissory note or received the loan, you are still responsible for repaying your loan.

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The summaries below offer a quick view of the types of forgiveness available for the different types of federal student loans.

Public Service Loan Forgiveness

If you are employed by a government or not-for-profit organization, you may be able to receive loan forgiveness under the Public Service Loan Forgiveness (PSLF) Program.

PSLF forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.

Teacher Loan Forgiveness

If you teach full-time for five complete and consecutive academic years in a low-income elementary school, secondary school, or educational service agency, you may be eligible for forgiveness of up to $17,500 on your Direct Loan or FFEL Program loans.

However, you may not receive a benefit for the same qualifying payments or period of service for Teacher Loan Forgiveness and Public Service Loan Forgiveness.

Loan Calculator

Whether you are comparing financial aid packages, preparing a budget, or estimating payments, these student loan calculators can help you plan your college finances:

  • Award Letter Comparison: Use this calculator to compare your financial aid award letters to understand how much your family will pay for college.
  • Monthly Payment Calculator: Use this calculator to estimate your monthly student loan payment.
  • Prepayment Calculator: Estimate how much you might save by making larger loan payments or paying your loan off earlier with this calculator.
  • Loan Amount Calculator: Estimate how much you need to borrow in student loans with this calculator.

Loan Forbearance

With forbearance, you won’t have to make a payment, or you can temporarily make a smaller payment. However, you probably won’t be making any progress toward forgiveness or paying back your loan. As an alternative, consider income-driven repayment.

Nevertheless, note that you are still responsible for paying the interest that accrues during the forbearance period if you are granted a forbearance.

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During a forbearance, you can either pay the interest as it accrues, or you can allow it to accrue and be capitalized (added to your loan principal balance) at the end of the forbearance period. Meanwhile, if you don’t pay the interest on your loan and allow it to be capitalized, the total amount you repay over the life of your loan may be higher.

Federal Student Loans

The U.S. Department of Education’s federal student loan program is the William D. Ford Federal Direct Loan (Direct Loan) Program. Under this program, the U.S. Department of Education is your lender. In fact, there are four types of Direct Loans available:

1. Parent PLUS Loans

Parent PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid.

Eligibility is not based on financial need, but a credit check is required. Still, borrowers who have an adverse credit history must meet additional requirements to qualify.

If you are a parent of a dependent undergraduate student, you can receive the loan for the remainder of your child’s college costs, as determined by his or her school, not covered by other financial aid.

2. Unsubsidized Loans

Unsubsidized Loans are loans made to eligible undergraduate, graduate, and professional students, but eligibility is not based on financial need.

3. Subsidized Loans

Subsidized Loans are loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school.

4. Consolidation Loans

This program allows you to combine all of your eligible federal student loans into a single loan with a single loan servicer.


MyFedLoan, or FedLoan Servicing, was established by the Pennsylvania Higher Education Assistance Agency (PHEAA). It has more than 50 years of student aid experience to support the U.S. Department of Education’s ability to service student loans owned by the federal government.

In fact, it is one of a limited number of organizations approved by the Department of Education to service these loans and is dedicated to supporting borrowers with easy and convenient ways to manage their student loans.

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