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Education

Applying for Financial Aid

Definitions to Know

  • borrower: a person legally responsible for repaying a loan and who has signed the promissory note
  • cancellation: the release of borrowers from their obligations to repay all or a portion of their ED loans; borrowers must meet certain requirements to be eligible
  • capitalized interest: unpaid, accumulated interest that is added to the loan principal; be­cause the principal increases, so does the total cost of the loan
  • consolidation: the combination of several types of federal education loans into one new loan; consolidation simplifies loan repayment
  • default: failure to repay a loan in accordance with the terms of the promissory note
  • deferment: the temporary postponement of loan payments; during this time, the borrower does not have to pay either principal or interest
  • delinquency: a failure to make payments when due, as specified in the promissory note and in the selected repayment plan; delinquency can lead to default
  • Direct Loans: loans made by the U.S. Department of Education (instead of a private lending institution) under the William D. Ford Federal Direct Student Loan Program; Direct Loans consist of Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans; a student can receive a Direct Unsubsidized Loan regardless of financial need
  • forbearance: temporary postponement or reduction of payments because of the borrower’s finan­cial difficulties; forbearance also may be an exten­sion of the repayment period; all borrowers are charged interest during forbearance
  • grace period: a period of time between when the borrower graduates or drops below half-time status and when repayment begins; for Stafford Loan or Direct Stafford Loan, the grace period is six months
  • guarantor: the state or nonprofit private agency that administers the Federal Family Education Loan (FFEL) Program in each state
  • interest: a loan expense charged to a borrower for the use of borrowed money; interest is calcu­lated as a percentage of the principal of the loan, which includes the original amount borrowed and any capitalized interest
  • lender: the organization that made the loan initially; the lender could be the borrower’s school (for Federal Perkins Loans), a bank, credit union, or other lending institution
  • loan holder: the organization that currently “owns” the loan and to which the borrower owes repayment; many banks sell loans, so the initial lender and the current holder could be different
  • loan principal: the total sum of money borrowed; loan principal includes the original amount borrowed plus any interest that has been capitalized
  • Perkins Loans: low-interest (5%) loans made under the Federal Perkins Loan Program to undergraduate and graduate students; because the school is the lender, students repay the school that made the Federal Perkins Loan or to the agent the school hires to service the loan; a student must show financial need to qualify
  • PLUS Loans: loans made to the parent of a student. Parents with good credit histories can borrow to help pay for the education expenses of a child who is a dependent undergraduate student enrolled at least half time at a participating school; the interest rate is variable but does not exceed 9%
  • prepayment: any amount the borrower pays before it is required to be paid under the terms of the loan’s promissory note; there is never a penalty for prepaying principal or interest on U.S. Department of Education loans
  • promissory note: a binding legal contract between a loan holder and a borrower; the promis­sory note contains the loan terms and condi­tions, including how and when the loan must be repaid; by signing this note, the borrower agrees to repay the loan
  • repayment schedule: a statement the loan holder provides the borrower, listing the amount borrowed, amount of monthly payments, and payment due dates
  • servicer: an agency a school or lender employs to service (collect) a student loan account; often, the borrower will deal with the loan servicer when there are questions about repayment; servicers also approve deferments and forbearances on the lender’s behalf
  • Stafford Loans: loans made to undergraduate and graduate students under the FFEL and Direct Loan programs; borrowers can receive FFEL or Direct Stafford Loans regardless of financial need
  • subsidized loan: a federal student loan made on the basis of the borrower’s financial need and other specific eligibility requirements; the federal government pays the interest on these loans while borrowers are enrolled at least half time, during the grace period, or during authorized periods of deferment
  • unsubsidized loan: a federal student loan made to a borrower meeting specific eligibility require­ments, but not based on financial need; the bor­rower is responsible for paying all interest that ac­crues throughout the life of an unsubsidized loan