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Financial Terms Glossary

Finance & Financial aid terms can be an alphabet soup of acronyms like FAFSA, SAR, SAP and EFC and technical terminology. It is almost like speaking a foreign language. This glossary defines the terms and acronyms that are most frequently used in basic finance or student financial aid.

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Adverse Credit History

Borrowers with an adverse credit history are ineligible for the Federal PLUS loan. An adverse credit history occurs when the borrower has a current delinquency of 90 or more days on more than $2,085 in total debt, the borrower had more than $2,085 in total debt in collections or charged off in the two years preceding the date of the credit report or certain derogatory events (e.g., bankruptcy discharge, default determination, repossession, foreclosure, tax lien, wage garnishment or the write-off of Title IV federal education loan debt) have occurred within the 5 years before the date of the credit report.

Aggregate Loan Limit

The aggregate (or cumulative) loan limit is the maximum amount that may be borrowed in total according to the terms of a loan.

Alternative Student Loans

An alternative student loan, typically called a private student loan, is a non-federal education loan made by a bank, financial institution or state. The terms of a private student loan are set by the lender, not the federal government, and the loan is not guaranteed against default by the federal government.

Amortization

Amortization spreads out the payments on a loan over time, often requiring installment payments to occur at regular intervals.

Annual Loan Limit

The annual loan limit is the maximum amount that may be borrowed per year under the terms of a loan.

Annual Percentage Rate

The annual percentage rate (APR) is an annualized interest rate that includes the effects of compound interest. The definition of APR is specified by the Truth in Lending Act (TILA) and Regulation Z.

Borrower

A borrower agrees to repay a loan of money, usually with the addition of interest.

Capitalization

Capitalization of interest occurs when unpaid interest is added to the principal balance of the loan. After interest is capitalized, interest may be charged on interest, not just principal, increasing the cost of the loan.

Compound Interest

Compound interest is the charging of interest on interest. This often occurs when interest is added to the principal balance of a loan or capitalized. Compound interest is in contrast with simple interest, where the interest is not added to the principal balance of the loan.

Cosigner

A cosigner agrees to repay a borrower’s debt. A cosigner is a co-borrower, equally obligated to repay the debt. If the primary borrower is late with a payment, the lender will seek payment from the cosigner. Delinquencies and defaults will be reported on the credit history of both the primary borrower and the cosigner. Cosigners often misunderstand the implications of cosigning a loan.

Credit Bureau

A credit bureau or credit reporting agency collects and analyzes information about a consumer’s borrowing and repaying behavior, summarizing the consumer’s credit performance in a credit rating.

Credit History

A credit history is a record of a consumer’s borrowing and repaying behavior, as tracked by a credit bureau. The credit history includes information about on-time payments, delinquencies and defaults, as well as adverse events such as bankruptcy discharges, repossessions and foreclosures.

Credit Reporting Agency

A credit reporting agency or credit bureau collects and analyzes information about a consumer’s borrowing and repaying behavior, summarizing the consumer’s credit performance in a credit rating.

Credit Score

A credit score or credit rating predicts the likelihood that a prospective borrower will repay the debt on time as per the agreement or promissory note. The FICO score is an example of a credit score. Lenders use credit scores to determine a borrower’s eligibility for a private student loan and the interest rate and fees that will be charged on the loan. Credit scores are typically on a range from 300 to 850, with a higher score signifying a lower credit risk. A borrower with a 620 or lower credit score is considered to be subprime. A 720 credit score is considered to be good and a 780 or higher credit score is considered to be excellent.

Cumulative Loan Limit

The cumulative loan limit is the maximum amount that may be borrowed in total according to the terms of a loan.

Direct Loan

A direct loan is made under the William D. Ford Federal Direct Loan Program, where funds for federal education loans come from the U.S. Treasury through the U.S. Department of Education. The Direct Loan program started with the 1992-1993 academic year.

Disbursement

Disbursement is the payment of student aid funds. After student aid funds are applied to institutional charges such as tuition, fees, room and board, any remaining funds are refunded to the student to pay for other college costs, such as books, supplies, transportation and miscellaneous / personal expenses.

Endorser

An endorser is a cosigner on a Federal PLUS loan. The endorser may not have an adverse credit history. The student on whose behalf a parent is borrowing may not serve as an endorser on the parent’s Federal Parent PLUS loan.

Entrance Counseling

Entrance counseling reviews the borrower’s rights and responsibilities and the terms of the borrower’s loans. Borrowers must undergo entrance counseling before they receive federal student loans for the first time.

Exit Counseling

Shortly before a federal student loan borrower graduates or drops below half-time enrollment, the borrower must undergo exit counseling. Exit counseling reviews the terms of the borrower’s loans and repayment plan options. Exit counseling also collects contact information from the borrower.

Federal Education Loans

Federal education loans include federal student loans, such as the Federal Perkins loan, Federal Stafford loan and Federal Grad PLUS loan, and federal parent loans, such as the Federal Parent PLUS loan. Federal education loans are made through the federal direct loan program and previously also through the Federal Family Education Loan Program.

Federal Family Education Loan Program

The Federal Family Education Loan (FFEL) program made federal education loans that were funded and serviced by banks and other financial institutions and guaranteed against default by the U.S. Department of Education. The FFEL program stopped originating federal student loans on June 30, 2010. All new federal education loans made on or after July 1, 2010 have been made through the Direct Loan program.

Federal Perkins Loan

The Federal Perkins Loan is a fixed-rate loan for undergraduate and graduate students with “exceptional financial need” as defined by the college or university.

Federal PLUS Loan

The Federal PLUS Loan is borrowed by parents of undergraduate students (Parent PLUS) or by graduate and professional school students (Grad PLUS).

Federal Stafford Loan

The Federal Stafford Loan is the largest federal student loan program. Federal Stafford loans may be subsidized, where the government pays the interest that accrues during periods of authorized deferment, or unsubsidized, where the borrower is responsible for the interest that accrues.

Fixed Interest Rate

A fixed interest rate is an interest rate that does not change throughout the life of the loan. Fixed interest rates yield a more predictable loan payment.

Grace Period

The grace period is a period of time, usually 6 or 9 months, between the in-school period and the beginning of the repayment period.

Index Rate

An index rate is a variable interest rate upon which other variable interest rates are based. Examples include the LIBOR index, the Prime Lending Rate and the interest rates of various U.S. Treasury securities.

In-School Period

The in-school period is a period of continuous enrollment during which the student maintains at least half-time enrollment. The grace period begins after the end of the in-school period.

Interest

Interest is a fee paid for the use of borrowed money, usually expressed as a percentage of the outstanding principal balance of the loan.

Interest Rate

An interest rate is the percentage of the outstanding principal balance of a loan that is paid to the lender in exchange for the use of the borrowed money.

Lender

A lender is a bank or financial institution that lends money to a borrower in exchange for payments of principal and interest.

Loan Origination

Origination of a loan involves processing a borrower’s loan application, denying or approving the loan application, and disbursing the loan.

Loan Servicer

A loan servicer is a company that manages sending out statements and coupon books and collecting payments on a loan, as well as other customer service functions. Some lenders service their own loans, while others outsource it to a third party company that specializes in servicing loans.

Master Promissory Note

The Master Promissory Note (MPN) is an agreement to repay federal education loans received during a continuous period of enrollment. It sets forth the terms and conditions of the loans.

Negative Amortization

Negative amortization occurs when the loan payments are less than the new interest that accrues.

Principal Balance

The principal balance of a loan is the outstanding balance upon which interest is charged.

Private Student Loan

A private student loan or alternative student loan is a non-federal education loan made by a bank, financial institution or state. The terms of a private student loan are set by the lender, not the federal government, and the loan is not guaranteed against default by the federal government.

Repayment Period

The repayment period is when a borrower must begin repaying his or her student loans. The repayment period begins after the end of the grace period.

Simple Interest

Simple interest is interest that is not compounded because it is not added to the principal loan balance.

Subsidized

A student loan is subsidized if the federal government pays the interest on the loan during periods of authorized deferment, such as during the in-school deferment and the economic hardship deferment.

Unsubsidized

The interest on an unsubsidized loan is the responsibility of the borrower. The government does not pay the interest on an unsubsidized loan.

Variable Interest Rate

A variable interest rate is an interest rate that changes (or “resets”) periodically. Often a variable interest rate is expressed as the sum of a variable-rate index, such as the LIBOR index, Prime Lending Rate or 91-Day T-Bill, plus a fixed margin that does not vary.