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Glossary

The following terms and definitions may be helpful as you consider, take out and repay any student loans.

Annual percentage rate: The annual percentage rate (APR) is the cost of a loan on a yearly basis. Disclosure of the APR is required by federal law to give borrowers the ability to compare the cost of different loans. It is different than the interest rate.

Award letter: An award letter, which is sent by the college or university, explains the various types of grants, scholarships, work-study and student loans available to students at a particular college or university for the upcoming academic year.

Borrower: A borrower is a person who signs and agrees to the terms in a promissory note or credit agreement and is responsible for repaying a loan. For student loans, the student is usually the borrower.

Capitalization: The addition of accrued and unpaid interest to the principal balance of a loan is called capitalization. Capitalization increases the total outstanding balance due. Interest is then charged on the new balance, which includes both the unpaid principal and the previously accrued interest. If borrowers do not make interest payments before beginning or resuming loan payments, the accrued interest on their loans may be capitalized, increasing the principal balance. Each time interest is capitalized, the principal balance increases, and capitalization may result in higher monthly payment amounts or a longer repayment term.

Consumer reporting agency: Often called credit bureaus, consumer reporting agencies collect and report information on individuals' borrowing and financial habits. Lenders often review a consumer credit report before approving loans.

Cosigner: A cosigner is a person who agrees to be responsible for a loan if the borrower does not fulfill his or her repayment obligations. Cosigners with good credit histories are often required for private student loans because traditional-age students do not have enough credit history to qualify for a loan on their own.

Cosigner release: Some private student loan lenders offer a cosigner release. This allows cosigners to be released from their responsibilities (such as being required to make payments if the borrower fails to do so) after the borrower has made a specific number of on-time monthly payments and meets the required credit criteria. Iowa Student Loan offers a cosigner release benefit for the Partnership Loan.

Credit report: Consumer reporting agencies generate a credit report with information received from lenders and organizations with which a person has a financial relationship. This information contains details about the person's financial transactions and payment history.

Debt-to-income ratio: The debt-to-income ratio is the amount of debt a person has compared to his or her overall income. Lenders often use this ratio to determine whether to lend applicants money. A low debt-to-income ratio is desirable. See student loan debt-to-income.

Default: Failure to repay a loan according to the terms agreed to when the borrower signed a promissory note or credit agreement for the loan is called default. The consequences of default can be severe.

Deferment: Deferment is a defined period of time during which the borrower is allowed to temporarily suspend payments, providing the borrower meets certain eligibility requirements. Interest may continue to accrue during the deferment period and will capitalize if not paid prior to the deferment end date. Deferment time is limited and is granted at the sole discretion of the lender. Private student loan lenders are not required to offer deferment.

Delinquency: Delinquency is a failure to make monthly loan payments when due. Delinquency begins with the first missed or late payment.

Direct Subsidized Loan: A subsidized student loan is a type of federal student loan that is based on financial need. The federal government pays the interest that accrues on a Subsidized Loan while the borrower is in an in-school or deferment status.

Direct Unsubsidized Loan: An unsubsidized student loan is a type of federal student loan that is not based on financial need. The borrower is responsible for paying the interest regardless of the loan status. Interest on Unsubsidized Loans accrues from the date of disbursement and continues throughout the life of the loan.

Disbursement: A student loan is disbursed when the money is transferred from a lender to the school or borrower. A student loan may be disbursed to the borrower or to the borrower's school over multiple dates.

Expected family contribution: The expected family contribution (EFC) is the number used by colleges and universities to determine a student's eligibility for federal student financial aid. It is calculated using the financial information the student provides in his or her FAFSA and is reported to the student on the Student Aid Report (SAR).

FAFSA: The FAFSA is the Free Application for Federal Student Aid, and it is the first step toward applying for financial aid. It is required for all federal aid and many types of state and institutional aid. Go to www.fafsa.gov to apply online.

FICO: The most widely used credit score, a FICO score can range from 300 to 850. The FICO is calculated by a complex mathematical model that evaluates the information in a person's credit report. The higher the FICO score, the better, because the person will appear less risky to lenders and creditors.

Financial aid: Financial aid is money that helps students pay for college. It includes grants, scholarships, work-study and student loans. Schools often create a financial aid package with the types and amounts of financial aid the student is offered to help pay college expenses and notify you of this via an award letter.

Financial need: A student's financial need is the difference between the cost of attendance at a school and his or her expected family contribution. Each school's cost of attendance is different, but a student's EFC does not change based on the school he or she attends.

Fixed interest rates: Fixed rates are set for the life of the loan and cannot change. Under standard or regular repayment plans, if a borrower pays the minimum payment on time each month, every monthly payment amount will remain the same.

Forbearance: Forbearance is an authorized, temporary postponement of repayment that is granted at the sole discretion of the lender. Borrowers must meet certain requirements to qualify for forbearance, and interest accrues during periods of forbearance and will capitalize if not paid prior to the forbearance end date. Private student loan lenders are not required to offer forbearance.

Interest: Interest is a loan expense charged by the lender and paid by the borrower for the use of borrowed money. Interest accrues daily based on the principal balance of student loans as of that day and the interest rate.

Interest rate: A loan's interest rate is an interest expense calculated as a percentage of the unpaid principal amount.

Lender: Private student loan lenders are typically banks, credit unions or other financial institutions. The U.S. Department of Education is the lender for federal student loans.

Origination fee: An origination fee is a one-time fee, usually a percentage of the total loan amount, that is generally deducted from the principal balance of a loan prior to disbursement of the loan proceeds. It is associated with the costs of administering the loan program.

PLUS Loan: The U.S. Department of Education makes federal Direct PLUS Loans to parents of dependent undergraduate students or to graduate or professional degree students through the Direct Loan Program to help pay college expenses.

Principal balance: The principal balance includes the original amount borrowed, plus any loan fees and capitalized interest, minus any payments made.

Private student loans: Private student loans are supplemental loans that are intended to fill any gaps in funding college after all other financial aid resources — scholarships, grants, work-study and federal student loans — as well as earnings and savings have been exhausted. Private student loans should not be used in place of other types of aid.

Student Aid Report: The Student Aid Report (SAR) is a summary of the information a student submitted on his or her FAFSA and contains the student's EFC. It will be emailed or mailed to the student after the FAFSA has been processed.

Student loan debt-to-income ratio: When determining how much a student can reasonably afford to borrow for college, consider his or her future student loan debt-to-income ratio. This ratio is simply the total of the student's monthly student loan payments divided by his or her expected monthly gross income, and it is often shown as a percentage. Some experts say a person's future student loan payments should be no more than 8% to 12% of his or her monthly salary at the time he or she begins making payments.

Variable interest rates: Variable rates are determined using a formula, usually a set interest rate plus a market rate index such as Prime or Libor (London Interbank Offered Rate). Variable rates may change daily, monthly, quarterly or annually depending on the formula used. Because these rates may fluctuate over time based on financial markets, your minimum monthly payment amount may change based on the rate being charged for that time period.

Private Student Loan Resources

What are private student loans?
How does the financial aid process work?
What is a credit score and why is it important?
How can I reduce loan costs for college?
Download the Choosing a Private Loan worksheet. (PDF)
How can I calculate my loan payments?
Glossary

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