Student Loan and Financial Aid Terms
Accrued Interest
Interest that accumulates on the unpaid principal balance of a loan.
Accrual Date
The date on which interest charges on an educational loan begin to accrue
Amortization
The process of gradually paying off a loan over time through scheduled payments of principal and interest.
Appeal
A formal request to have a financial aid administrator review your aid eligibility and possibly use their professional judgment to adjust the figures. For example, if you believe the financial information on your financial aid application does not reflect your family's current ability to pay (for example, recent unemployment, death of a parent/guardian, or other significant event.) The financial aid administrator may require documentation of the special circumstances or of other information listed on your financial aid application.
Asset
An item of value, such as a home, business, farm, real estate, stocks, bonds, mutual funds, cash, certificates of deposit, bank accounts, trust funds and other property and investments.
Balloon Payment
A larger than usual payment used to pay off the outstanding balance of a loan without penalty. Not all loans allow balloon payments. Simple interest loans, like many educational loans, generally do allow balloon payments.
Bankruptcy
A person is declared bankrupt when they are found to be legally insolvent and the person’s property is distributed among his/her creditors or otherwise administered to satisfy the interests of creditors.
Borrower
The person who takes out the loan.
Bursar’s Office
The university office that is responsible for the billing and collection of university charges.
Campus-based Aid
Financial aid programs administered by the university. The federal government provides the university with a fixed annual allocation, which is awarded by the financial aid administrator to deserving students. Such programs include the Perkins Loan, Supplemental Education Opportunity Grant and Federal Work-Study. Note that there is no guarantee that every eligible student will receive financial aid through these programs, because the awards are made from a fixed pool of money. This is a key difference between campus-based loan programs and the Direct Loan Program.
Cancellation
Some loan programs provide for cancellation of the loan under certain circumstances, such as death or permanent disability of the borrower. Some of the federal student loan programs have additional cancellation provisions.
Capitalization
The practice of adding unpaid interest charges to the principal balance of an educational loan, thereby increasing the size of the loan. Interest is then charged on the new balance, including both the unpaid principal and the accrued interest. Capitalizing the interest increases the monthly payment and the amount of money you will have to repay. If you can afford to pay the interest as it accrues, you are better off not capitalizing.
Collateral
Property that is used to secure a loan. If the borrower defaults on the loan, the lender can seize the collateral. For example, a mortgage is usually secured by the house purchased with the loan.
Collection Agency
A company hired by the lender or guarantee agency to recover defaulted loans.
Compounded Interest
Interest that is paid on both the principal balance of the loan and on any accrued (unpaid) interest. Capitalizing the interest on an unsubsidized Stafford loan is a form of compounding.
Consolidation
A loan that combines several student loans into one bigger loan from a single lender. The consolidation loan is used to pay off the balances on the other loans.
Cosigner
A cosigner on a loan assumes responsibility for the loan if the borrower should fail to repay it.
Credit Rating
An evaluation of the likelihood of a borrower to default on a loan. Credit bureaus and credit reporting agencies provide this information to banks and businesses to help them decide whether to issue a loan or extend credit. Your credit rating may include your payment history, a list of current and past credit accounts and their balances, employment and personal information, and a history of past credit problems. Defaulting on a loan can hurt your credit rating.
Default
A loan is in default when the borrower fails to pay several regular installments on time (i.e., payments overdue by 270 days) or otherwise fails to meet the terms and conditions of the loan. if you default on a loan, the university, the holder of the loan, the state, and the federal government can take legal action to recovery the money, including garnishing your wages and withholding income tax refunds. Defaulting on a government loan will make you ineligible for future federal financial aid, unless a satisfactory repayment schedule is arranged, and can affect your credit rating.
Deferment
Occurs when a borrower is allows to postpone repaying the loan. If you have a subsidized loan, the federal government pays the interest charges during the deferment period. If you have an unsubsidized loan, you are responsible for the interest that accrues during the deferment period. You can still postpone paying the interest charges by capitalizing the interest, which increases the size of the loan.Most federal loan programs allow students to defer their loans while they are in school at least half time. If you don't qualify for a deferment, you may be able to get a forbearance. You can't get a deferment if your loan is in default.
Delinquent
If the borrower fails to make a payment on time, the borrower is considered delinquent and late fees may be charged. If the borrower misses several payments, the loan goes into default.
Direct Loans
The William D. Ford Federal Direct Loan Program (aka the Direct Loan Program) is a federal program where the school becomes the lending agency and manages the funds directly, with the federal government providing the loan funds. Not all schools currently participate in this program. Benefits of the program include faster turnaround time and less bureaucracy than the old "bank loan" program. The terms for direct loans are the same as for the Stafford Loan program. For more information about Direct Loans, contact the Direct Loan Servicing Center at 1-800-848-0979.
Disbursement
The release of loan funds to the school for delivery to the borrower. The payment will be made co-payable to the student and the school. Loan funds are first credited to the student's account for payment of tuition, fees, room and board, and other school charges. Any excess funds are then paid to the student in cash or by check. Unless the loan amount is under $500, the disbursement will be made in at least two equal installments.
Discharge
To release the borrower from his or her obligation to repay the loan.
Disclosure Statement
Provides the borrower with information about the actual cost of the loan, including the interest rate, origination, insurance, and loan fees, and any other kinds of finance charges. Lenders are required to provide the borrower with a disclosure statement before issuing a loan.
Due Diligence
If a borrower fails to make payments on their loan according to the terms of the promissory note, the federal government requires the lender, holder, or servicer of the loan to make frequent attempts to contact the borrower via telephone and mail to encourage him or her to repay the loan and make arrangements to resolve the delinquency.
Entitlement
Entitlement programs award funds to all qualified applicants. The Pell Grant is an example of such a program.
Equity
The dollar value of your ownership in a piece of property.
Expanded Lending Option (ELO)
Under ELO, some schools can offer higher annual and cumulative loan limits to students receiving the Perkins Loan. The ELO is restricted to schools with a Perkins Loan default rate of 15% or less.
Expected Family Contribution (EFC)
The amount of money that the family is expected to be able to contribute to the student's education, as determined by the Federal Methodology need analysis formula approved by Congress. The EFC includes the parent contribution and the student contribution, and depends on the student's dependency status, family size, number of family members in school, taxable and nontaxable income, and assets. If you have unusual financial circumstances (such as high medical expenses, loss of employment, or death of a parent) that may affect your ability to pay for your education, tell your financial aid administrator. He or she may be able to adjust your EFC to increase your aid.
FAFSA
Free Application for Federal Student Aid
Federal Direct Student Loan Program (FDSLP)
Similar to the Federal Family Education Loan Program (FFELP). The funds for these loans are provided by the US government directly to students and their parents through their schools. Benefits of the program include faster turn-around time and less bureaucracy than the old "bank loan" program. The FDSLP includes the Federal Direct Stafford Loan (Subsidized and Unsubsidized) and the Federal Direct Parent Loan for Undergraduate Students (PLUS).
Federal Family Education Loan Program (FFELP)
Includes the Federal Stafford Loan (Subsidized and Unsubsidized), the Federal Perkins Loan, and the Parent Loan for Undergraduate Students (PLUS). The funds for these loans are provide by private lenders, such as banks, credit unions, and savings and loan associations. These loans are guaranteed against default by the federal government.
Federal Methodology
The needs analysis formula used to determine the EFC. The Federal Methodology takes family size, the number of family members in college, taxable and nontaxable income, and assets into account. Unlike most institutional methodologies, however, the Federal Methodology does not consider the net value of the family residence.
Federal Work-Study (FWS)
Program providing undergraduate and graduate students with part-time employment during the school year. The federal government pays a portion of the student's salary, making it cheaper for departments and businesses to hire the student. For this reason, work-study students often find it easier to get a part-time job. Eligibility for FWS is based on need. Money earned from a FWS job is not counted as income for the subsequent year's need analysis process.
Fellowship
A form of aid given to graduate students to help support their education. Some fellowships include a tuition waiver or a payment to the university in lieu of tuition. Most fellowships include a stipend to cover reasonable living expenses (e.g., just above the poverty line). Fellowships are a form of gift aid and do not have to be repaid.
Financial Aid
Money provided to the student and the family to help them pay for the student's education. Major forms of financial aid include gift aid (grants and scholarships) and self-help aid (loans and work).
Financial Aid Office (FAO)
The college or university office that is responsible for the determination of financial need and the awarding of financial aid.
Financial Aid Package
The complete collection of grants, scholarships, loans and work-study employment from all sources (federal, state, institution and private) offered to a student to enable them to attend the college or university. Note that unsubsidized Stafford loans and PLUS loans are not considered part of the financial aid package, since these financing options are available to the family to help them meet the EFC.
Fixed Interest
In a fixed interest loan, the interest rate stays the same for the life of the loan.
Forbearance
During a forbearance, the lender allows the borrower to temporarily postpone repaying the principal, but the interest charges continue to accrue, even on subsidized loans. The borrower must continue paying the interest charges during the forbearance period. Forbearances are granted at the lender's discretion, usually in cases of extreme financial hardship or other unusual circumstances when the borrower does not qualify for a deferment. You can't receive a forbearance if your loan is in default.
Free Application for Federal Student Aid (FAFSA)
Form used to apply for Pell Grants and all other need-based aid. As the name suggests, no fee is charged to file a FAFSA.
Garnishment
The practice of withholding a portion of a defaulted borrower's wages to repay his or her loan, without their consent.
Grace Period
A short time period after graduation during which the borrower is not required to begin repaying his or her student loans. The grace period may also kick in if the borrower leaves school for a reason other than graduation or drops below half-time enrollment. Depending on the type of loan, you will have a grace period of six months (Stafford Loans) or nine months (Perkins Loans) before you must start making payments on your student loans. The PLUS Loans do not have a grace period.
Grant
A type of financial aid based on financial need that the student does not have to repay.
Gross Income
Income before taxes, deductions and allowances have been subtracted.
Guarantee Agency or Guarantor
State agencies responsible for approving student loans and insuring them against default. Guarantee agencies also oversee the student loan process and enforce federal and state rules regarding student loans.
Guarantee Fee
A small percentage of the loan that is paid to the guarantee agency to insure the loan against default. The insurance fee is usually 1% of the loan amount (and by law cannot exceed 3% of the loan amount).
Independent
An independent student is at least 24 years old as of January 1 of the academic year, is married, is a graduate or professional student, has a legal dependent other than a spouse, is a veteran of the US Armed Forces, or is an orphan or ward of the court (or was a ward of the court until age 18). A parent refusing to provide support of their child's education is not sufficient for the child to be declared independent.
Installment Loan
A consumer loan in which the principal and interest are repaid on a regular (usually monthly) schedule. The payments are called "installments" and are all for the same amount.
Insurance Fee
Fee passed on by the lender to the federal government as insurance against default. Insurance fees are charged as the loan is disbursed and typically run to 1% of the amount disbursed.
Interest
Amount charged to the borrower for the privilege of using the lender's money. Interest is usually calculated as a percentage of the principal balance of the loan. The percentage rate may be fixed for the life of the loan or it may be variable, depending on the terms of the loan. All federal loan issued since October 1992 use variable interest rates that are pegged to the cost of US Treasury bills.
Lender
A bank, credit union, savings and loan association, or other financial institution that provides funds to the student or parent for an educational loan. Note: Some schools now participate in the Federal Direct Loan Program and no longer use a private lender, since loan funds are provided by the US Government.
Leveraging
If a school offers a talented student extra financial aid, regardless of need, the student is more likely to enroll. Leveraging is the controversial practice of figuring out how much it will take to attract such students and customizing aid offers to optimize the quality of the incoming class.
Line of Credit
Pre-approved loan that lets you borrow money up to a pre-set credit limit, usually by writing checks. A line of credit doesn't cost you anything until you write a check. Then you begin repayment just like a regular loan.
Loan
A type of financial aid which must be repaid, with interest. The federal student loan programs (FFELP and FDSLP) are a good method of financing the costs of your college education. These loans are better than most consumer loans because they have lower interest rates and do not require a credit check or collateral. The Stafford Loans and Perkins Loans also provide a variety of deferment options and extended repayment terms.
Loan Forgiveness
The federal government cancels all or part of an educational loan because the borrower meets certain criteria (e.g., is performing military or volunteer service).
Loan Interviews
Students with educational loans are required to meet with a financial aid administrator before they receive their first loan disbursement and again before they graduate or otherwise leave school. During these counseling sessions, called entrance and exit interviews, the FAA reviews the repayment terms of the loan and the repayment schedule with the student.
Maturity Date
The date when a loan comes due and must be repaid in full.
Merit-based
Financial aid that is merit-based depends on your academic, artistic or athletic merit, or some other criteria, and does not depend on the existence of financial need. Merit-based awards use your grades, test scores, hobbies, and special talents to determine your eligibility for scholarships.
Mortgage
A loan of funds for purchasing a piece of property which uses that property as security for the loan. The lender has a lien on the property and will receive the property if the borrower fails to repay the loan.
Need
The difference between the Cost Of Attendance and the Estimated Family Contribution is the student's financial need - the gap between the cost of attending the school and the student's resources. The financial aid package is based on the amount of financial need. The process or determining a student's need is known as need analysis.
Need-Based
Financial aid that is need-based depends on your financial situation. Most government sources of financial aid are need-based.
Need-Blind
Under need-blind admissions, the school decides whether to make an offer of admission to a student without considering the student's financial situation. Most schools use a need-blind admissions process. A few schools will use financial need to decide whether to include marginal students in the wait list.
Need-Sensitive
Under need-sensitive admissions, the school does take the student's financial situation into account when deciding whether to admit him or her. Some schools use need-sensitive admissions when deciding to accept a borderline student or to pull a student off of the waiting list.
Net Income
Income after taxes, deductions and allowances have been subtracted.
Origination Fee
Fee paid to the bank to compensate them for the cost of administering the loan. The origination fees are charged as the loan is disbursed, and typically run to 3% of the amount disbursed, but can go up to 4%. A portion of this fee is paid to the federal government to offset the administrative costs of the loan.
Parent Loans for Undergraduate Students (PLUS)
Federal loans available to parents of dependent undergraduate students to help finance the child's education. Parents may borrow up to the full cost of their children's education, less the amount of any other financial aid received. PLUS loans may be used to pay the EFC. There is a minimal credit check required for the PLUS loan, so a good credit history is required. Check with your local bank to see if they participate in the PLUS loan program. If your application for a PLUS loan is turned down, your child may be eligible to borrow additional money under the Unsubsidized Stafford Loan Program.
Pell Grant
A federal grant that provides funds of up to $2,340 based on the student's financial need.
Perkins Loan
Formerly the National Direct Student Loan Program, the Perkins Loan allows students to borrow up to $3,000/year (5 year maximum) for undergraduate school and $5,000/year for graduate school (6 year maximum). The Perkins Loan has one of the lowest interest rates and is awarded by the financial aid administrator to students with exceptional financial need. The student must have applied for a Pell grant to be eligible. The interest on the Perkins Loan is subsidized while the student is in school.
Prepayment
Paying off all or part of a loan before it is due. Some loans occassionally charge fees or limit your ability to prepay on the loan. However, student loans generally don't have prepayment restrictions.
Principal
The amount of money borrowed or remaining unpaid on a loan. Interest is charged as a percentage of the principal. Insurance and origination fees will be deducted from this amount before disbursement.
Private Loans
Education loan programs established by private lenders to supplement the student and parent education loan programs available from federal and state governments.
Promissory Note
A written promise to pay or repay a specified sum of money at a stated time or on demand. Also called note of hand.
Repayment Schedule
the repayment schedule discloses the monthly payment, interest rate, total repayment obligation, payment due dates, and the term of the loan.
Repayment Term
The term of a loan is the period during which the borrower is required to make payments on his or her loans. When the payments are made monthly, the term is usually given as a number of payments or years.
Sallie Mae
(Formerly known as SLMA or the Student Loan Marketing Association) The nation's largest secondary market. Sallie Mae holds approximately one third of all educational loans.
Secondary Market
An organization that buys loans from lenders, thereby providing the lender with the capital to issue new loans. Selling loans is a common practice among lenders, so the bank you make your payment to may change during the life of the loan. The terms and conditions of your loan do not change when it is sold to another holder. Sallie Mae is the nation's largest secondary market and holds approximately one third of all educational loans.
Servicer
An organization that collects payments on a loan and performs other administrative tasks associated with maintaining a loan portfolio. Loan servicers disburse loan funds, monitor loans while the borrowers are in school, collect payments, process deferments and forbearances, respond to borrower inquiries, and ensure that the loans are administered in compliance with federal regulations and guarantee agency requirements.
Simple Interest
Interest that is paid only on the principal balance of the loan and not on any accrued interest. Most federal student loan programs offer simple interest. Note, however, that capitalizing that interest on an unsubsidized Stafford loan is a form of compounded interest.
Stafford Loans
Federal loans that come in two forms: subsidized and unsubsidized. Subsidized loans are based on need; unsubsidized loans aren't. The interest on the subsidized Stafford Loan is paid by the federal government while the student is in school and during the six month grace period. The subsidized Stafford Loan was formerly known as the Guaranteed Student Loan (GSL). The unsubsidized Stafford Loan may be used to pay the EFC.
State Student Incentive Grants (SSIG)
A state-run financial aid program for state residents. The states receive matching funds from the federal government to help them fund the program.
Statement of Educational Purpose
A legal document in which the student agrees to use the financial aid for educational expenses only. The student must sign this document before receiving federal need-based aid.
Student Aid Report (SAR)
Report that summarizes the information included in the FAFSA and must be provided to your school's financial aid office. The SAR will also indicate the amount of Pell Grant eligibility, if any and the Expected Family Contribution (EFC).
Student Contribution
The amount of money the federal government expects the student to contribute to his or her education, which is included as part of the EFC. Student contribution depends on the student's income and assets, but can vary from school to school. Usually a student is expected to contribute about 35% of his or her savings and approximately one-half of his or her summer earnings above $1,750.
Subsidized Loan
With a subsidized loan, such as the Perkins Loan or the subsidized Stafford Loan, the government pays the interest on the loan while the student is in school, during the six month grace period, and during any deferment periods. Subsidized loans are awarded based on financial need and may not e used to finance the family contribution. See also Unsubsidized Loan.
Supplemental Education Opportunity Grant
Federal grant program for undergraduate students with exceptional need. SEOG grants are awarded by the school's financial aid office and provide up to $4,000 per year. To qualify, a student must also be a recipient of a Pell Grant.
Supplemental Loan for Students
Federal loans for financially independent students. This program was eliminated in 1994 with the creation of the unsubsidized Stafford Loan program.
Term
The number of years (or months) during which the loan is to be repaid
Unsecured Loan
A loan not backed by collateral, representing a greater risk to the lender. The lender may require a co-signer on the loan to reduce their risk. If you default on the loan, the co-signer will be held responsible for repayment. Most student loans are unsecured loans. In the case of federal student loans, the federal government guarantees repayment of the loans. Other examples of unsecured loans include credit card charges and personal lines of credit.
Unsubsidized Loan
A loan for which the government does not pay the interest. The borrower is responsible for the interest on an unsubsidized loan from the date the loan is disbursed, even while the student is still in school. Students may avoid paying the interest while they are in school by capitalizing the interest, which increases the loan amount. Unsubsidized loans are not based on financial need and may be used to finance the family contribution. See also Subsidized Loan.
Variable Interest
In a variable interest loan, the interest rate changes periodically. For example, the interest rates of Stafford Loans are updated annually on July 1. Other loans may be adjusted semi-annually or quarterly.
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