Dictionary
Understanding the language of educational loans
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Borrowing money for college can be confusing but knowing the language of educational
loans can help you better understand the process. The following definitions
should help clarify the meaning of terms related to educational loans.
academic year: a period of at least 30 weeks of instructional time (26 weeks for clock hours) that begins on the first day of classes and ends on the last day of classes or examinations. A full-time undergraduate student would be expected to complete a minimum of 24 semester or trimester hours or 36 quarter hours. For a school measuring progress in clock hours, the student would be expected to complete at least 900 clock hours.
accrual date: the day interest charges on an education loan begin.
capitalization: the process of adding unpaid interest to the principal balance of an education loan, increasing both the total amount to be repaid and the monthly payment.
consolidation: a loan program that allows borrowers to combine all of their federal education loans into a single loan. The program allows borrowers to make a single monthly payment and extend the repayment period (up to 30 years depending on the loan amount). Consolidation loans can make loan repayment more manageable for borrowers with high loan balances.
default: failure of a borrower to repay his or her loan according to the terms agreed upon when the promissory note was signed. When a borrower defaults, the school, organization holding the loan, state government and federal government can take action to recover the money. Defaults are reported to national credit bureaus and might affect a borrower’s ability to get credit in the future.
default fee: an insurance premium that is deducted from the borrower’s loan proceeds before disbursement and is collected by the guarantee agency that insures the loan. By law, the fee cannot exceed 1 percent of the loan amount.
deferment: an authorized period of time during which a borrower may postpone either principal payments or principal and interest payments. Deferments are available while borrowers are in school at least half time or enrolled in a graduate fellowship program or rehabilitation training program, as well as during periods of unemployment or economic hardship. Other deferments might be available for those who borrowed money prior to July 1, 1993. The federal government makes interest payments on subsidized Federal Stafford and certain consolidation loans during authorized deferment periods.
delinquency: failure of a borrower to make a loan payment on the scheduled payment due date.
dependent students: must report their parents' income and assets, as well as their own, on the FAFSA. Federal student aid is based on the concept that a dependent student's parents have the primary responsibility for the student's education.
disbursement: the release of loan funds to a school for delivery to the borrower. Disbursements for most loans are made in equal, multiple installments — usually co-payable to the borrower and school — and sent to the school from the lender.
eligible non-citizen: a student who must have an Arrival-Departure Record (I-94) from U.S. Citizenship and Immigration Services (USCIS) showing one of the following designations: Refugee, Asylum Granted, Cuban-Haitian Entrant-Status Pending, Conditional Entrant (valid only if issued before April 1, 1980), or Parolee (you must be paroled in the U.S. for at least one year and provide evidence from the USCIS that you are in the U.S. for other than a temporary purpose and intend to become a citizen or permanent resident).
expected family contribution (EFC): the amount a student and his or her family are expected to pay toward college expenses. This amount is calculated using a formula established by Congress based on the information supplied on the Free Application for Federal Student Aid (FAFSA).
Federal Family Education Loan Program (FFELP): a program authorized by Congress, through which education loans are provided by private lenders and guaranteed by the federal government. Subsidized and unsubsidized Federal Stafford loans and PLUS loans are included in the program (formerly the Guaranteed Student Loan Program).
Federal PLUS loan: a non-need-based loan available for parents of dependent undergraduate students and to graduate or professional students with good credit histories.
financial aid: financial assistance in the form of scholarships, grants, employment opportunities and education loans from federal, state and private sources.
financial need: the difference between the cost of attending a particular school and the calculated family contribution, less any other financial aid a student is receiving. A student’s financial need determines the loan amount for which he or she qualifies.
forbearance: an authorized period of time during which the lender agrees to temporarily postpone or reduce a borrower’s payment. Borrowers are still responsible for the interest during this period. A forbearance may be granted at the lender’s discretion if a borrower intends to repay his or her loan but is experiencing temporary financial difficulties.
Free Application for Federal Student Aid (FAFSA): a federal form required to apply for federal student aid. Forms are available online at www.fafsa.ed.gov, or paper copies can be found at high schools, colleges and local libraries. The information on this form is used to determine the student’s expected family contribution (EFC).
grace period: a transition period – generally six months following the date a borrower leaves school or drops to below half-time status – during which the borrower is not required to make loan payments. This period is designed to help the borrower prepare for repayment.
guarantee agency (guarantor): an entity which acts as an agent for the federal government to administer and insure FFELP loans made by lenders in the event of default, bankruptcy, disability or death of borrowers. The guarantor will also assist you if you experience problems with your student loan. If you do not repay your loan, the guaranty agency will purchase your loan from the lender and collect directly from you. In Oklahoma, the Oklahoma Guaranteed Student Loan Program (OGSLP), a division of the Oklahoma State Regents for Higher Education, serves as the federal government’s guarantee agency.
independent students: students who report only their own income and assets (and those of a spouse, if married). Not living with parents or not being claimed by them on the tax form does not define dependency status.
in-school status: the status assigned to a student who is either attending school at least half-time or who is in a grace period. The federal government pays the interest on subsidized Federal Stafford loans while a student is in this status.
interest: a fee charged for the use of borrowed money. Interest is calculated as a percentage of the principal loan amount. The rate may remain constant throughout the life of the loan (fixed rate) or it may change at specified times (variable rate). As of July 1, 2006, all new Federal Family Education Loan Program loans have fixed interest rates.
lender: a financial institution (e.g. bank, savings and loan, or credit union) that loans funds to students and parents for educational costs. Some schools are also lenders.
loan: borrowed money that must be repaid with interest.
Master Promissory Note (MPN): The legal agreement that a borrower signs with their lender when receiving an education loan. The MPN lists conditions under which the money is borrowed and the terms under which the borrower agrees to repay the loan with interest. It allows a borrower to receive loans for either a single academic year or multiple academic years. Borrowers should always keep copies of their MPN(s) until loans are fully repaid.
origination fee: a fee charged by the federal government and deducted from loan proceeds before disbursement. The proceeds from this fee are used to partially offset administrative costs of the education loan program.
principal: the amount of money borrowed. Interest is charged based on the principal. Guarantee and origination fees are deducted from the principal prior to disbursement.
repayment schedule: a schedule listing a borrower’s monthly payment, interest rate, total repayment amount, payment due dates and the repayment period.
S
secondary market: an organization established to purchase loans from lenders.
This allows lenders to replenish capital to fund new loans. Selling loans is
a common practice among lenders and does not affect the terms and conditions
under which the loan was originally made.
servicer: a company employed by a lender or secondary market to perform the administrative tasks, such as collecting payments, that are associated with education loans. Original interest and repayment terms remain in effect.
subsidized Federal Stafford loan: a need-based loan on which interest is paid by the federal government during the in-school, grace and deferment periods.
U
unsubsidized Federal Stafford loan: a loan that is not based on need and the
interest is not paid by the federal government. Borrowers are responsible
for all interest on unsubsidized loans from the date the loan is disbursed.
The U.S. Department of Education: administers the Federal Family Education Loan Program (FFELP) and develops regulations to protect you as a borrower.