12 Financial Terms You Need To Know As A Student

12 Financial Terms Every Student Should Know Finance is just one of the few classes I feel that every college student should take, but because most students don’t take finance, I’ve put together this list of 12 basic financial terms you need to know as a student. This group of financial terminology everyone should know will help you with your game plan when trying to pay off your student loans. Financial jargon is an entirely different language. As a medical student, I never came across any finance course I would have been glad to be forced to take, but I did have to take an unnecessary state history course unfortunately. Financial literacy classes should be mandatory, but they just weren’t part of my course curriculum. Based on firsthand experience I want to help you! Nevertheless, let’s get started:

What is a Direct Subsidized Loan?

A Direct Subsidized Loan is a loan where the government will actually pay the interest being accumulated while you’re in school. You have to be enrolled into school at least part-time, and if you’ve already graduated with this type of loan in deferment or forbearance, then the government will continue covering the interest as well. A few good things about Direct Subsidized Loans include:
  1. The government pays your interest while you remain enrolled part-time in school.
  2. The government will pay your interest if you’re in deferment or forbearance status.
  3. No payments should be due until about six months after graduating college.
Now, a few bad things about Direct Subsidized Loans:
  1. Graduate students do not qualify for this type of loan unfortunately.
  2. If you rely on your parents for much of your financial need, then you may not qualify either.
  3. The cap for Direct Subsidized Loans is around $23,000 compared to Direct Unsubsidized Loans which is higher.

What Does Deferment Mean?

Deferment, often interchangeably used as forbearance, means that you can temporarily stop making student loan payments or temporarily reduce the amount you need to pay. It’s essentially a loan status you need to apply for with your loan servicer. Although this blog centers around paying off your student loans in the most effective way possible, there are a few good reason to defer your student loans:
  1. You are in extreme financial hardship.
  2. You are called into active duty for military service.
  3. You are enrolled or returning to school.

What Is A Direct Unsubsidized Loan?

Direct Unsubsidized Loans are quite the opposite of Direct Subsidized Loans. A Direct Unsubsidized Loan is a loan where the government will not pay for the interest being accumulated while you are in school. Sad to say, interest starts accumulating the moment the loan is disbursed into your account. A simple example would be that if you take a $20,500 loan in your first year of a 3 year college curriculum, that $20,500 loan on a 6% interest rate will accumulate to roughly $22,800 by the time you graduate.
A few good points about Direct Unsubsidized Loans include:
  1. Undergraduate and graduate students can be eligible for this type of loan.
  2. Borrowers don’t need to provide proof of financial hardship in order to qualify.
  3. The limit cap for borrowing is roughly $31,000 compared to its counterpart.
The main downside to this type of loan is regarding the interest rate responsibility. As said before, borrowers are responsible for their interest as soon as its taken out- no grace period after graduation and no grace period for interest during enrollment either.

What Is A Minimum Monthly Payment?

This term means exactly what it means- a minimum monthly payment is the amount you must pay on your student loan every month. Of course though, if you pay the minimum amount per month, it’s going to take you longer to pay off your loans; therefore, more interest will accrued. If you’re wondering, “Can I pay more than the minimum monthly amount on my student loans?”, the answer is yes, you can- and it’s highly recommended that you do in order to save money in the future.

What Is Compound Interest?

Compound interest is the interest on initial loan amount, plus any interest that has accumulated towards the loan over time. In other words, when you are borrowing, it’s the interest that is charged on the original amount you owed plus the interest charges that are added to your outstanding balance over time. In ever more simple terms, compound interest is “Interest on interest.” It will grow at a faster rate than simple interest, which is only calculated for the original loan amount alone.

What is FICO?

FICO is an acronym for Fair Isaac Corp.- the company that came up with the methodology in order to calculate a credit score. The corporation came up with several factors to come up with your credit score such as: payment history, length of credit card history, and total amount owed on your credit. FICO scores range from 300 to 850, and the higher your FICO score, the better. With a high FICO score, you’ll be able to acquire better terms when receiving your next loan or credit card. On average, people with scores below 620 tend to have a harder time landing better terms in their favor. College is a great time to start building your FICO score as it is an important part of your financial hemisphere especially in the future. Reasons why your credit score is important include:
  1. Your FICO score can help you borrow money in the future when you’re buying a new house or car. If you can get a 4% interest rate because of a good credit score on a $200,000 mortgage, the total interest paid on a 30 year mortgage plan will be about $150,000. If your credit score did not qualify for a 4% interest rate, but a 5.5% interest rate instead, you would then pay over $200,000 interest over the next 30 years- nearly $50,000 more.
  2. You can qualify for better terms when signing up for cable, internet, or cell phone plans.
  3. In summary, credit scores in the future help you access better financial deals.

What Are Assets?

The definition I learned from assets comes from the definitive book Rich Dad Poor Dad. Assets are things that you own in value, but they are things that increase your wealth. In other words, assets are things that put money in your pocket for you. Over the years, I’ve been trying to build assets and a few that I’ve been successful with include:
  • Stock investments that increase in value over time
  • Paying for a design illustration to be created placed on a shirt to sell passively
  • YouTube videos that generate ad revenue
  • A general business that generates income yearly from freelancers whom I hire
Basically, instead of buying a $200 pair of shoes that don’t do anything for you except even decrease in value, I choose to spend that $200 on new designs, stocks, or hiring a freelancer who can make more money for me. I was not always like this though as it was not too long ago when I was a shoe head. I look back it now and it was probably in the thousands in which how much I paid for with shoes. I looked up how much some of the pairs I have are worth now, and they’ve definitely lost anywhere from 40-80% of their value. It’s from reading books, articles, and listening to podcasts that changed my mindset to focus more on purchasing assets rather than liabilities.

What Are Liabilities?

Liabilities are items that you spend for that consume money or decrease in value over time. Recall those shoes I mentioned earlier? Those are a liability because not only do they decrease in value over time, but they also do not generate yourself income. Sadly, the majority of things us college students buy are probably liabilities: games, clothes, expensive food, concert tickets, alcohol.. the list can go on and on.

What Are Defined-Contribution Plans?

When you start your first post-grad job, you are gonna be faced with the idea of contributing to a 401(k) or 403(b). These are essentially retirement plans that companies offer as a benefit. Money from your paycheck goes into these retirement plans pretax, and you would be able to withdraw money from these plans when you make it to roughly 59 years or older. The money you receive is taxed as ordinary income.

What is a Direct PLUS Loan?

A Direct PLUS Loan is another type of loan which can be taken by undergraduate or graduate students. This type of loan does require a credit score check and the interest is fairly higher than other loans. The downside to this loan is like the unsubsidized loan in which interests starts accruing while enrolled in school.

What Is A Work Study Program?

A work study program are opportunities given to students to work on campus while performing their studies. I personally work in a work study program. Tasks usually involve office assistants, library assistants, lab assistants, tutors, and campus monitors.

What Is a Public Service Loan Forgiveness Program?

After you graduate, you may want to consider working on a Public Service Loan Forgiveness Program. It essentially involves working full-time in a public service job for 10 years. Jobs include school teachers, police, fire department, EMT members, public defenders, or working for the military. After 10 years of full-time public work, your loans will be forgiven.

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