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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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Bankruptcy

Bankruptcy refers to the cancellation (discharge) of all or part of a borrower’s debts. It allows borrowers who can no longer pay their debts to get a clean slate. It may involve liquidating the borrower’s assets and distributing the proceeds to the borrower’s creditors (Chapter 7) or reorganizing a borrower’s loans to provide a 3-5 year repayment plan (Chapters 11, 12 or 13). Borrowers with a Chapter 7, Chapter 11 or Chapter 12 bankruptcy are ineligible for a Federal PLUS loan for five years from the date of the bankruptcy discharge. The US Bankruptcy Code at 11 USC 523(a)(8) establishes an exception to discharge that makes it almost impossible to discharge federal and private student loans in bankruptcy. Borrowers must demonstrate undue hardship in an adversarial proceeding, which is a very harsh standard.

Cancellation

Cancellation of a debt eliminates the obligation to repay the debt. There are several types of loan cancellation, including loan forgiveness (cancellation in exchange for particular activities by the borrower) and discharge (cancellation based on circumstances that affect the borrower’s ability to repay the debt).

Collection Costs

Collection costs are the costs that are incurred in collecting a defaulted loan. Collection costs may include collection agency commissions, attorney fees, court costs, postage, telephone calls, cost of skip tracing, and the cost of reporting the debt to credit bureaus. Collection costs are usually charged to the defaulted borrower.

Consolidation Loan

A consolidation loan is a form of refinance, where a new loan repays the outstanding balance on other loans, replacing them with a single new loan. Consolidating a borrower’s loans will streamline and simplify repayment and may result in a lower or higher interest rate, depending on the type of consolidation loan and whether the borrower’s credit has improved.

Default

When a loan payment is more than a specified number of days late, the loan is considered to be in default. The loan’s promissory note may provide for more aggressive collection activities and penalties when a loan is in default. A private student loan is considered to be in default when it is more than 120 days delinquent. A federal education loan is considered to be in default when it is more than 360 days late.

Deferment

A deferment is a temporary suspension of the obligation to repay a debt, such as an in-school deferment or economic hardship deferment. The federal government pays the interest on subsidized loans during periods of authorized deferment but not during a forbearance.

Delinquency

A delinquency is a failure to make a payment on time. On-time payment is usually defined as a payment received by the due date, although some lenders provide a grace period during which late payments are still considered to be on time. For example, a late fee will be charged in the direct loan program if a borrower fails to make a required payment within 30 days of the due date. In the FFEL program, the grace period is 15 days. Delinquencies are often measured in terms of the number of days that have passed since the payment due date (e.g., a 30-day delinquency, a 60-day delinquency and a 90-day delinquency). A serious delinquency is more than 90 days delinquent. If a private student loan is more than 120 days delinquent or a federal education loan is more than 360 days delinquent, the loans are considered to be in default.

Discharge

Discharge is the cancellation of a debt, usually because of the borrower’s inability to repay the debt. Examples include the death discharge and the total and permanent disability discharge.

Due Date

The due date is the date an installment payment is due. If a payment has not been received by the due date, it is considered to be late.

Forbearance

A forbearance is a temporary suspension of the obligation to repay a debt. Forbearances are provided to a student who is willing to repay his or her loans but has demonstrated an inability to do so. Forbearances may also be provided when a loan transitions from one status to another or from one servicer to another. Interest continues to accrue during a forbearance and will be capitalized (added to the loan balance) if the borrower does not pay it as it accrues. Unlike a deferment, the federal government does not pay the interest on subsidized loans during a forbearance.

Late Fee

When a loan payment is delinquent, the borrower may be charged a late fee. Late fees on federal education loans may be no more than 6 percent of the overdue payment.

Loan Forgiveness

Loan forgiveness is the cancellation of debt, usually for performing employment or other services for a period of time.

Loan Rehabilitation

Loan rehabilitation is a process that returns a defaulted federal education loan to active repayment status and clears the default from the borrower’s credit history. There are two ways to rehabilitate a defaulted federal education loan. One involves making 9 out of 10 consecutive, on-time, full, voluntary, reasonable and affordable monthly payments on the loan. The other involves consolidating the loan with a requirement that the borrower repay the loan in the income-based repayment plan. Rehabilitation is a one-time opportunity to remove the default from the borrower’s credit history and regain eligibility for federal student aid. If the borrower defaults again, the only option to clear the default is to repay the debt in full.

National Student Loan Data System

The National Student Loan Data System (NSLDS) is a database that records all federal education loans and grants made by the U.S. Department of Education as well as student enrollment status information. It replaced the Financial Aid Transcript.

Outstanding Balance

The outstanding balance on a loan is the sum of unpaid principal, unpaid interest and any unpaid fees. This may be less than the loan’s payoff amount, which will include any applicable additional interest that will accrue by the payoff date, as well as any collection charges.

Prepay

To prepay a debt is to make extra payments on the debt to accelerate repayment.

Prepayment Penalty

A prepayment penalty is a fee charged if a borrower makes a full or partial prepayment on the debt. There are no prepayment penalties on federal and private student loans.

Repayment Plan

A repayment plan determines the monthly payments on a loan. Examples include standard repayment, extended repayment, graduated repayment, income-contingent repayment, income-based repayment, income-sensitive repayment and pay-as-you-earn repayment.

Total and Permanent Disability

A borrower with a medically-determinable physical or mental impairment that prevents the borrower from engaging in substantial gainful activity is considered to have a total and permanent disability if the disability is expected to result in death, has lasted for a continuous period of at least 60 months or is expected to last for a continuous period of at least 60 months. Veterans who have been determined by the federal Veterans Administration (VA) to be unemployable because of a service-related disability may also be considered to have a total and permanent disability. Borrowers with a total and permanent disability may have their federal education loans discharged.

Undue Hardship

For a borrower to get a student loan discharged in bankruptcy, the borrower must demonstrate undue hardship in an adversarial legal proceeding. Generally, undue hardship involves a three-part test: (1) the borrower must be unable to repay the loans and maintain a minimal standard of living for the borrower and the borrower’s dependents, (2) the circumstances that prevent the borrower from repaying the loan must be expected to continue for most of the life of the loan and (3) the borrower must have made a good faith effort to repay the loan.

Wage Garnishment

Up to 15 percent of a defaulted borrower’s wages may be seized to repay defaulted student loans. The U.S. Department of Education may garnish the wages of a defaulted borrower of federal education loans administratively, without obtaining a court order. Private student loan programs, on the other hand, must obtain a court order to garnish a defaulted borrower’s wages. Employers must comply with wage garnishment orders or face severe consequences.