Glossary of Student Loan Refinancing TermsDecember 20, 2018
There are so many terms that borrower’s encounter in the student loan application process, most borrowers may not be exactly sure what each means. If you’re getting ready to apply or just want to know what the documents are talking about, here’s our glossary of common student loan terms that you should know.
Adjusted Gross Income (AGI) and Gross Income
Gross income is the total income you earn in a year before deductions for federal or state taxes, credits, and so on. Adjusted gross income is the income you earn in a year which is eligible to be taxed after accounting for deductions. AGI is usually lower than your gross income and is what many institutions use to determine if you can get perks like loan tax benefits or financial aid, grants, etc. The easiest place to find these are on your official tax return.
Adverse Action Letter
When you apply for credit, insurance, a loan, or sometimes even employment, and are denied due to something negative on your credit report, the organization inquiring might be required to send you one of these. It explains why you were turned down and it’s important because it gives you a reason to see if something is wrong on your credit report.
This term describes how the principal is paid over the course of a loan. Most student loans are fully amortized, meaning that if all payments are made as scheduled over the life of the loan the principal balance will be fully repaid at the maturity date. Other types of loans, including some types of mortgage loans, have a feature known as a balloon payment. With a balloon payment, regularly scheduled payments do not fully repay the principal amount borrowed, so when the loan matures the final payment contains a larger, or balloon, payment of all remaining principal.
Annual Loan Limit
This is the maximum loan amount you can borrow for an academic year. Loan limits can vary by facts like grade level and loan type.
If you received financial aid, expect to see an award letter that explains the different types of aid for which you are eligible. The document will also include information about your loans, grants, or scholarships, and you’ll see a new one each year that you’re in school.
The person who is responsible for paying back a student loan. You may not be the only one responsible, like if you signed with a cosigner, but the loan is for you and your academic fees and tuition. You’re the borrower.
When unpaid interest gets added to the principal balance (increasing your overall balance and future interest), this is called capitalization. This is why it’s important to pay interest whenever possible. Capitalization might happen at the end of a grace period or deferment, or after forbearance, depending on whether it’s a federal or private loan. When a loan is consolidated or if it enters default, capitalization may occur.
If needed, borrowers can add a second person who shares responsibility for a student loan. This second person co-signs the loan and becomes partially responsible for repayment in the event that the primary borrower is not able to pay.
Consolidation is when a new loan replaces your current student loans. People might do this to make payments easier to manage or to reduce the amount you owe each month or in total. There are lots of things to know about consolidation.
A loan is considered delinquent when a scheduled payment is not made in a timely manner. Delinquency can result in the imposition of late charges, collection calls or letters, and negative information being placed on a credit report. Default is when the lender determines that the borrower has failed to honor the terms of the loan agreement in such a way that the lender is entitled to declare the entire loan balance due and payable, even if the loan has not yet reached its maturity date. Serious delinquency is very often the reason for a loan being declared in default, but loan agreements typically provide that certain other events can trigger a default. Before entering into a loan agreement, always read the loan agreement carefully and understand what can constitute a default under that loan.
Students can usually postpone loan repayment if they meet certain criteria. This might be a pre-set time limit or can be when someone is in school and not able to make payments. Unsubsidized loans accrue interest while being deferred, but subsidized loans do not accrue interest while in deferment.
This is when your school receives funds like financial aid money or student loan funds. The institution then applies it to your bill for tuition and school-related fees. If you consolidate, the disbursement happens when money is sent to pay off your old loans.
When some or all of your student loan debt is canceled, this is called discharge.
Entrance/Exit Interview or Counseling
Schools provide entrance or exit counseling to help students understand important financing topics like how to repay loans and stay in good standing with student loans. This can happen during enrollment as an entrance to the process, and after graduation as part of leaving the school system.
Expected Family Contribution (EFC)
This amount is an estimate based on how much money you, your spouse, and/or family can contribute to your tuition for the academic year. It’s calculated with information provided on your FAFSA and helps determine your financial need. Financial need is calculated as the cost of attendance minus your EFC. This determines your eligibility for aid including Stafford loans, Perkins loans, scholarships, and grants.
Fixed or Variable Interest Rate
If an interest rate cannot change over time, it is fixed. A variable interest rate can change over the life of the loan. Variable rates can move up or down based upon changes to an identified index, such a prime rate, a particular U.S. Treasury note, or LIBOR. LIBOR stands for the London Interbank Offered Rate, and is an index commonly used with student loans. Some variable rate loans may have a “cap” and/or a “floor.” A cap is the maximum rate that can be applied to the loan, regardless of changes to the index. A floor is just the opposite – the minimum rate for the loan regardless of changes to the index.
Forbearance is when you can postpone or reduce student loan payments, but interest continues to accrue and increase the total amount you owe.
Free Application for Federal Student Aid (FAFSA)
FAFSA is the application a student must complete to apply for any type of federal student aid including loans, grants, or scholarships.
Whether you are enrolled or not, and your status as part-time or full-time can affect different aspects of student loan financing and repayment. Part-time is usually six credit hours and full-time is twelve, but this can vary.
While in actively enrolled in school, you might be able to postpone your federal or private student loan payments until you graduate or drop below half time.
When you qualify for certain programs, you may be able to have the final balance of your loans forgiven after a certain period of time. There are specific criteria for eligibility and usually a detailed application process.
Master Promissory Note (MPN)
This document states the terms of repayment for your student loans and is the official document proving your commitment to repay the money you borrowed with interest. To receive federal loans, all borrowers must sign an MPN.
The principal balance is the amount of money borrowed under the loan that you currently owe. It doesn’t include interest or fees that are either unpaid or yet to accrue.
This amount of time is what you have to repay your student loans. Standard for Stafford loans is ten years, but this can be extended with reduced repayment plans. The longer you take to pay your loans, usually, the more you end up paying in interest. A repayment plan is the formal agreement you have with a servicer that details how you plan to repay your loans each month.
These terms represent all of your rights and responsibilities for the student loan, including what you’ll pay for monthly payments. Lenders are required to disclose repayment terms to you before you can commit to borrowing a loan.
Right to Cancel
Once an approved application has been accepted by the borrower, the federal Truth in Lending Act requires the lender to provide a Final Truth in Lending disclosure statement. This final disclosure statement includes a three business day right to cancel, during which time the borrower can change their mind and cancel the loan. To protect borrowers, the lender cannot disburse the loan proceeds until the right to cancel period has expired.
The loan servicer handles your student loan billing like collecting payments and offering customer service between you and the lender.
Student Aid Report (SAR)
The SAR is a detailed list of all of the financial and personal information you submitted for your FAFSA, including financial info for your family. Your school receives a copy of this and you should receive one as well.
Subsidized and Unsubsidized Loans
While in school and during your grace period, the government pays the interest on your subsidized loans so you don’t have to. Federal loans that are not based on financial need are unsubsidized, meaning you’re responsible for paying the interest that accrues.