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Glossary of Loan Terminology

Principal

  • The amount of the loan borrowed. Example: When a borrower takes a loan of $10,000, this $10,000 is called the principal.

Interest

  • A fee charged for the use of borrowed money. Interest is calculated as a percentage of the principal loan amount.

Variable rate

  • The interest rate fluctuates at specific intervals over the life of the loan; fluctuations are usually tied to certain monetary measures such as the average interest rates on Treasury Bills (T-bill) or the prime rate of interest. The interest on a variable interest rate loan may change every three months or each year.

Fixed Rate

  • The interest rate remains the same over the life of the loan.

Accruing

  • The interest accumulates.

Capitalization

  • (Compounding) - Accrued and unpaid interest is added to the principal to create a new and higher balance. Example: A $5,000 loan at 10% interest, capitalized annually, will accrue $500 in interest in the first year the principal is outstanding. At the end of the first year, the $500 in interest will be added (capitalized) to the $5,000 principal balance and the loan is now $5,500. At the end of the second year, the amount of interest accrued will be $550, which will be added to the $5,500 for a new balance of $6,050.

Promissory Note

  • The legal document borrowers sign when they apply for an education loan. It lists conditions under which the money is borrowed and the terms under which the borrower agrees to repay the loan with interest. Borrowers should always keep the borrower copy of their promissory notes until loans are fully repaid.

Co-Signer

  • A signer other than the education loan borrower who assumes responsibility for repayment in the event the borrower does not pay.

Disbursement

  • The release of loan funds to the school for delivery to the borrower. Disbursements for most loans are made in equal multiple installments, are usually co-payable to the borrower and school and are mailed to the school. Disbursements may also be made by electronic funds transfer (EFT).

Guarantee Fee

  • An insurance premium deducted from the borrower's loan proceeds prior to disbursement and paid to the guaranty agency that insures the loan. The guaranty agency is a state, regional or national organization acting as an agent for the federal government to administer and insure loans made by lenders.

Origination Fee

  • A fee charged by the federal government and deducted from loan proceeds, prior to disbursement, to partially offset administrative costs of loans.

Subsidized Loan

  • Need-based loan on which interest is paid by the federal government until the borrower enters repayment.

Unsubsidized Loan

  • A non need-based loan on which interest is not paid by the federal government. Borrowers are responsible for interest on all unsubsidized loans from the date the loan is disbursed. Unpaid interest usually accrues and is capitalized at repayment. Depending on the lender, accrued interest can also be capitalized at the end of each quarter or year.

Entrance/Exit Interview

  • Counseling sessions borrowers are required to attend before receiving their first loan disbursement and again before leaving school.

Grace Period

  • The period between the time the borrower leaves school and the time they are obligated to begin repaying. On most loans, the grace period is six or nine months.

Repayment Period

  • The amount of time permitted to repay the loan once the loan enters repayment. The repayment period is usually 10 years.

Repayment Options

  • The amount and timing of repayment such as equal payments, graduated payments, income sensitive repayments.

Consolidation

  • A loan program that allows lenders to pay off a borrower's education loans by creating one new loan. By extending the repayment period (up to 30 years depending on the loan amount) and allowing a single monthly payment, consolidation loans can make loan repayment more manageable for borrowers with high loan balances.

Deferment

  • An authorized period of time during which a borrower may postpone principal or principal and interest payments. The federal government makes interest payments on subsidized Stafford Loans during authorized deferment periods. For most other loans the interest continues to accrue during authorized deferment periods.

Forbearance

  • An authorized period of time during which the lender, holder or servicer agrees to temporarily postpone a borrower's total repayment obligation to prevent delinquency or default. An extension of time or smaller payments may also be granted. The interest on the loan will continue to accrue and may also be capitalized during forbearance. As it will take longer to repay the loan, the interest accrues for a longer period thus increasing the total cost of the loan.

Lender

  • An institution (bank, savings and loan, credit union or university) that provides the funds for students to borrow education loans.

Guarantor

  • Agency that guarantees repayment of a loan to a lender.

Loan Servicer

  • A company employed by a lender to perform the administrative tasks, such as collecting payments, processing deferments or a forbearance, answering correspondence, etc.

Secondary Market

  • An organization established to purchase education loans from lenders. This allows lenders to replenish capital to fund new loans. The original terms and conditions of the loan remain the same.

Holder

  • The institution with legal title to a borrower's loan. The holder may be the lender that originally made the loan, a secondary market to which the lender has sold the loan, or in the event of a default, the guarantor.