Frequently Used Financial Aid Terms

Academic Year - A period of time used to measure a quantity of study. For example, an academic year may consist of fall/winter/spring quarters during which a student must complete a specific number of units. Academic years vary from school to school and even from educational program to educational program at the same school.

Amortization - The process of spreading out loan payments over a period of time. Borrowers receive estimated repayment or amortization schedules when they choose a particular repayment option.

APR (Annual Percentage Rate) - An expression of the effective interest rate that the borrower will pay on a loan, taking into account one-time fees and standardizing the way the rate is expressed. In other words, the APR is the total cost of credit to the consumer expressed as an annual percentage of the amount of credit granted. The APR is likely to differ from the "note rate" or "headline rate" advertised by the lender, due to the addition of other fees that may need to be included in the APR. Lenders are required to disclose the APR before the loan is finalized.

Bankruptcy - Bankruptcy is an inability to pay debts. There are three kinds of bankruptcy: Chapter 11 for businesses, and Chapters 7 and 13 for individuals (personal bankruptcy).

     Chapter 7 discharges most debts and can include liquidation of most assets. The courts allow reasonable exceptions such as a limited amount of home equity, car, furniture and clothes. Chapter 7 is most damaging personally because assets may be liquidated. It is also most damaging because future creditors will see that little to no attempt was made to pay off debt--instead it was erased.

     Chapter 11 is an effort to restructure a company and its debts.

     Chapter 13 is a court-approved repayment plan to repay debts in three to five years. This method of bankruptcy enables the person to keep his/her property and is less damaging personally because assets are not liquidated. It is also less damaging because future lenders will see that an effort was made to repay debts versus discharging them.

Borrower Benefits - Sometimes referred to as repayment incentives or rewards programs, these are usually interest rate discounts and account credits offered by some lenders or loan programs for timely repayment and payment through an automatic bank draft.

Capitalization - The process of adding accrued and unpaid interest back to the original principal amount borrowed, thereby increasing the principal balance owed. Capitalization policies vary by loan program, and by lender.

Cosigner - An individual other than the borrower who signs a promissory note and thereby assumes equal liability for it. Also called a co-maker.

Cost of Attendance (COA) - The total amount it will cost a student to go to school—usually expressed as a yearly figure. It is determined using rules established by law. The COA includes tuition and fees; a housing and food allowance; allowances for books, supplies, transportation, loan fees and any dependent care expenses; costs related to a disability; and other miscellaneous expenses.

Credit History - A record of an individual's past borrowing and repaying behavior. It will list personal information, credit lines currently in the person's name, and risk factors like late payments or a recent bankruptcy.

Credit Worthiness - A lender's or creditor's measure of an individual's ability to meet debt obligations.

Debt-to-Income Ratio - A figure that calculates how much of a person's income is spent paying his or her debts. The higher one's debt-to-income ratio, the more of their monthly income that is solely devoted to paying back debts. Formula = Monthly debts owed divided by monthly income.

Default - Failure to repay a loan according to the terms agreed to when you signed a promissory note. In many cases default can be avoided by submitting a request for a deferment, forbearance, or cancellation and by providing the required documentation before reaching the point of default. The consequences of default are severe. Your school, the lender or agency that holds your loan, the state and the federal government may all take action to recover the money, including notifying national credit bureaus of your default. This affects your credit rating for a long time. For example, you might find it very difficult to borrow money from a bank to buy a car or a house. In addition, the U.S. Education Department might ask the Internal Revenue Service to withhold your U.S. individual income tax refund and apply it to the amount you owe, or the agency holding your loan might ask your employer to deduct payments from your paycheck. Also, you’re liable for expenses incurred in collecting the loan. If you decide to return to school, you’re not entitled to receive any more federal student aid. Legal action might also be taken against you.

Deferment - A period of time, usually following grace, during which a borrower may defer or delay repayment. Deferments may be borrower-based, as is the case with old and new Stafford/Direct Loan borrowers. Deferments can also be loan-specific, which simply means the deferment is based not on the borrower, but on the loan type (as is the case with Perkins, PCL and some other loans). Borrowers must apply with their loan servicer for deferments. Regardless of type, deferments are good for one year at a time.

Delinquency - Incidents of late or missed loan payments, as specified in the terms of the promissory note and the repayment plan. Your late payments may be reported to credit bureaus and will become part of your credit history. You may also lose out on the opportunity to earn borrower benefits for on-time payments if you are late making payments.

Direct Consolidation Loan - The consolidation program offered by the federal government through the Direct Loan Program (see FDSLP).

Exit Loan Counseling - A group or individual session during which loan borrowers who are leaving school or dropping below half-time enrollment receive important information about repayment obligations and provide their current contact information to the university.

FDSLP - Federal Direct Student Loan Program (FDSLP) or Direct Lending - The federal government's loan program where students borrow federal Stafford Loans directly from the federal government instead of from banks or other similar lending institutions. Stafford Loans borrowed through the Direct Loan Program are often referred to as Direct Loans, and borrowers with Direct Loans are often referred to as Direct Loan borrowers.

Federal Loan Consolidation - The consolidation program offered by banks and other similar lending institutions, such as SallieMae (see FFELP).

FFELP - Federal Family Education Loan Program (FFELP) - What some would call the traditional loan program where students borrow federal Stafford Loans through banks or other similar lending institutions. Borrowers with Stafford Loans through FFELP are sometimes referred to as FFELP borrowers.

Fixed Interest Rate - An interest rate that is fixed and will not change throughout the life of the loan.

Forbearance - Period of time, often following grace and deferment, during which a borrower may either a) make payments lower than those scheduled or b) delay repayment completely for a designated period of time, usually six months to one year. Borrowers must apply with their loan servicer for forbearance. Forbearance periods are usually loan specific, and forbearance provisions usually vary by loan type. Interest accrues on all loans during forbearance (including loans formerly subsidized), interest which, if not paid during forbearance, will be capitalized at the end of each forbearance period.

Grace Period - A period of time during which a borrower is not required to begin repayment. Grace periods are loan-specific, meaning a) the length of the grace period varies by loan type and b) once used in their entirety, the borrower may not use the grace period again for that particular loan. Borrowers do not have to apply for grace.

GSL Program Loans - The umbrella name for the Guaranteed Student Loan (GSL), Supplemental Loan for Students (SLS), Parent Loan for Undergraduate Students (PLUS), and federal Stafford Loans (subsidized and unsubsidized). GSL and SLS loans are no longer made, having been replaced with Stafford Loans. Some publications will use Stafford Loans to refer to GSL Program Loans.

Guarantee Fee - A lender's insurance against a defaulting loan.

Holder - The organization that owns a borrower's loan or holds the paper and to whom the borrower owes repayment. Some lenders sell loans to other lenders, resulting in a new holder for the borrower.

Inflation - An increase in prices. The U.S. Federal Reserve attempts to manage inflation by influencing interest rates. One reason inflation could be high is because there is more money chasing fewer goods. To control inflation, the Federal Reserve may increase interest rates, making borrowing more expensive, which reduces demand. Reduced demand for goods and services can lead to lower prices, which reduces inflation.

Interest Rates -

     Fixed = The interest rate does not change; risk is on the lender when rates increase.

     Variable = The interest rate changes; risk is on the borrower when rates increase.

Lender - The organization that provides the money for a student loan. The lender may be a bank, a credit union, a school, the federal government, or another lending organization. The lender is the organization to whom the borrower initially owes repayment, and at that point, the lender is also the holder of the borrower's loan.

LIBOR (London Inter-Bank Offer Rate) - The LIBOR is the interest rate that banks charge each other for loans (usually in Euro dollars). This rate is applicable to the short-term international inter-bank market, and applies to very large loans borrowed anywhere from one day to five years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day.

Loan Principal - The total sum of money borrowed.

“New” Stafford Borrower - Borrower whose first Stafford Loan disbursement was made on or after July 1, 1993.

“Old” Stafford Borrower - Borrower who had an outstanding balance on a GSL Program Loan (GSL, SLS, Stafford) as of July 1, 1993, and who did not pay off that balance in full prior to taking out a new Stafford Loan after that date.

Origination Fee - Charge assessed for disbursement of loan funds.

Prime Rate - The Prime Rate is the rate banks use in pricing short-term commercial loans to their most creditworthy customers. This index is currently used to calculate the interest rate on some private loans. The Prime Rate can also be found in the business section of most newspapers, and in the Tuesday edition of the Wall Street Journal.

Promissory Note - The binding legal document you sign when you get a student loan. It lists the conditions under which you’re borrowing and the terms under which you agree to pay back the loan. It will include information on how interest is calculated and what the deferment and cancellation provisions are. It’s very important to read and save this document because you’ll need to refer to it later when you begin repaying your loan.

Recession - A decline in the value of all goods and services produced in the U.S. for two consecutive quarters. The Federal Reserve may reduce interest rates to lower the cost of borrowing, which could lead to increased demand for goods. This in turn can lead to an increase in the overall output of the nation.

Satisfactory Academic Progress (SAP) - To be eligible to receive federal student aid, students must meet the school's written standards of satisfactory academic progress (qualitative and quantitative) toward their degree or certificate.

Secondary Market - An organization that specializes in buying student loans, resulting in their becoming the loan's holder.

Servicer - An organization hired by a lender or holder to provide loan servicing functions and to work with borrowers on repayment issues. Some organizations serve as both the holder and servicer of student loans. You may find that the loan servicer is the most important organization you will work with on your student loans.

Subsidized Loans - Loans that are interest-free to the borrower during school, grace and other authorized deferment periods. Examples include federal subsidized Stafford (either FFELP or Direct), federal Perkins Loans, Primary Care Loans (PCL), Loans for Disadvantaged Students (LDS), Health Professions Student Loans (HPSL), and some institutional loans (check your promissory note or ask your medical school financial aid officer).

T-Bill (Treasury Bill)  - The T-Bill is a short-term U.S. government debt obligation. This government index is currently used to calculate the interest rate on many loans, including most federal subsidized and unsubsidized Stafford/Direct Loans and some private loans. The T-Bill can be found in the business section of most newspapers.

Truth-in-Lending - A federal law requiring lenders to fully disclose in writing the terms and conditions of a loan, including the annual percent interest rate and other charges.

Unsubsidized Loans - Loans that accrue interest from the date of disbursement, interest which, if unpaid by the borrower, will be added back to the principal through a process called capitalization. Examples include federal unsubsidized Stafford (either FFELP or Direct), federal SLS, federal PLUS, Health Education Assistance Loans (HEAL), private loans, and some institutional loans (check your promissory note or ask your financial aid officer).

Variable Interest Rate - Interest rate that varies throughout the life of the loan. Variable rates are usually tied or indexed to a government rate such as the 91-Day T-Bill or the Prime Rate. Loans that are tied to a variable rate usually change quarterly or annually every July 1.