Life After College: Terms Everyone Should Know

Here’s the financial spinach. Eat it.

— Roth IRA

A retirement account that’s often a great option for younger people with less income, particularly if their employers don’t offer anything. Here’s why: You contribute money that has already been taxed as part of your paycheck — and since younger people tend to earn less, they pay less in taxes on what they make. But the best part is that you don’t pay taxes later when you withdraw money for retirement.

— Student Loan Deferment

A period when loan payments are temporarily suspended or reduced, if you’re eligible. The big difference between deferment and forbearance (both terms for putting things off) is whether interest continues to accrue on what you owe. During a deferment, it does not when the loan is federally subsidized, but it does with other federal loans. In a forbearance, all federal loans accrue interest. Private lenders usually have their own forbearance rules, so don’t expect interest to be waived in those cases.

— Student Loan Consolidation

When multiple outstanding student loans are combined into one bigger loan from a single lender, which is then used to pay off the balances on the other ones. Consolidation can come with dangers, though. Combining federal loans into a new private loan, for example, eliminates your ability to take advantage of income-based repayment programs. And in some cases you could miss out on benefits like loan forgiveness for public service.

— 401(k)

A type of retirement plan typically offered by big companies. Workers can set aside a portion of their earnings up to a government-set ceiling, reducing taxable income in the year contributions are made. The money is taxed when it’s withdrawn in retirement. Some employers match contributions, typically up to a certain percentage of your salary. That’s free money — so take it. Nonprofit and government employers may offer similar plans, but many of those are lightly regulated and have high costs and poor investment options.

— Deductible

A sum paid out of pocket before an insurance policy starts to cover bills. A $500 deductible on a health insurance policy, for example, means the insured person or entity is responsible for the first $500 in (covered) services before insurance kicks in. It’s also common with auto and renter’s policies. Higher deductibles can help reduce a policy’s cost, and the higher the deductible, the lower premium payments tend to be.

— Index Fund

A type of mutual fund that typically invests in every stock or bond in a particular category — like big American stocks, for example (and is considered to be far less risky than betting on individual stocks or bonds). Research shows that index funds tend to outperform mutual funds that hold investments picked by humans. A big reason: Index funds are significantly cheaper than actively managed funds. (Brokers who sell funds may add their own sales commissions, or loads. Avoid them.)

— HMO

One of several types of health insurance plans, health maintenance organizations, or HMOs, typically cover services only within a defined network of providers. Most care is coordinated through a primary care doctor, who makes referrals to specialists as needed.

— PPO

A preferred provider organization, or PPO, is a common type of health insurance plan. They’re more flexible than HMOs. because they don’t require referrals from primary care doctors. Using providers within a PPO network generally costs less; out-of-network providers cost more. Some policies set a deductible before coverage kicks in. Copayments may also be required for each visit to a provider, and other policies may require paying a percentage of covered charges.

— ETF

A type of investment that looks a bit like a mutual fund but trades on an exchange as stocks do. Exchange-traded funds typically track an index, like the Standard & Poor’s 500, or another category of investments like small American stocks or emerging markets. Many ETFs, like index funds, charge rock-bottom fees. Because they trade like stocks, a commission is paid each time shares are bought or sold. Several providers, including Vanguard and Fidelity, waive commissions on an array of ETFs.

— Credit Score

A three-digit score that runs on scale of 300 to 850, the higher the better. Credit card issuers and other lenders use it to judge how likely you are to repay. Landlords, car insurers and cellphone carriers may also check it before doing business with you. FICO scores are the most widely used version; VantageScores are gaining popularity. Both are increasingly available free from banks and credit card issuers.

— Credit Report

The basis for your credit score, it compiles details about outstanding loans, credit cards, whether you’ve paid your bills on time and other financial data, along with personal information like your Social Security number and home addresses. Check your report for errors and fraudulent activity at least once a year. Three big companies — Equifax, Experian and TransUnion — keep the files (and know more about you than you may imagine).

— Income-Based Repayment

A program potentially available to those whose federal student loan payments consume a major chunk of income. Monthly payments are typically set at a maximum of 10 or 15 percent of a borrower’s earnings, though some people may be eligible to have no monthly payments (based on income and family size). The remaining balance can be forgiven after about 20 or 25 years of payments. Those in certain public service jobs may have loans forgiven in 10 years.

— Credit Freeze

A good way to protect against identity theft, it shuts off access to credit files at the three main credit bureaus, blocking thieves from taking loans or opening accounts in your name. But if you need to apply for credit, even car insurance, you’ll need to temporarily lift a freeze by contacting the bureaus. They also offer credit locks, which are similar but have more drawbacks.

— Compound Interest

When your savings begin to experience a snowball effect — the interest or returns you’ve earned also begin earning money, and so on. This is what makes saving early and often so powerful.