Discover Student Loans - Glossary of Financial Aid Terms

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Glossary of financial aid terms

Academic Year: Time during which a college or university has classes.
Accrued Interest: Interest that adds up on an unsubsidized loan while a student is in school or when a loan is in forbearance or deferment.
Alternative Loans: Also known as a private loan, this is a loan made through a private lenders (who may also be a federal lender). The eligibility for alternative education loans (or private loans) usually depends on credit score. Typically the interest rates for private loans are higher than federal loans because private loans are not guaranteed.
Award Letter: A letter sent to students from a college they applied to once they’ve been accepted. The letter outlines the different types and amount of financial aid being offered.

Borrower: A person who takes out a loan in his or her name. This is either the student or a parent.

Cancellation: Loans are cancelled if a student dies, is totally and permanently disabled or works in certain in-demand fields, such as teaching or health care.
Capitalization: Interest that collects on an unsubsidized loan (such as the unsubsidized Stafford, PLUS, Grad PLUS or private loans) while the student is in school.
Compound Interest: Interest that is calculated based not only on the original amount (principal) but also on any interest that has already accrued.
Consolidation: Combining two or more loans into one. This can sometimes save students money because they can get a lower interest rate and/or a longer repayment time (sometimes up to 30 years), but the total sum that needs to be repaid will be larger. Never consolidate loans that offer certain benefits that would be cancelled by consolidating.
Consolidation Loan: A loan that has been consolidated.
Cosigner: A person who signs for a loan along with the primary borrower (usually the student) and agrees to pay if the primary borrower does not.
Cost of Attendance (COA): The amount of money it will cost to attend a certain school (per year). This is sometimes called the “student budget,” which includes tuition, fees, room and board, books and supplies, travel, and personal and incidental expenses.
Credit: A summary of your financial strengths and weaknesses, gathered through your history of spending and repaying debt.
Credit Rating: Credit is rated based on a score that lets lenders see how strong your financial history is and helps predict how likely you are to repay future loans.

Default: When a borrower fails to pay off a loan without permission from the lender (like in cases of deferment or forbearance). A loan defaults when a payment is more than 270 days late and the borrower didn’t go into deferment or forbearance.
Deferment: Delaying your loan by up to three years. Deferments apply to those who go back to school, are unemployed, join the Peace Corps or serve in a war. Deferments are only applicable to federal loans.
Dependent Student: Any student applying for financial aid who is still claimed as a dependent on a parent’s tax return. Dependent students must provide their parents’ financial information when completing the FAFSA.
Disbursement: When a lender makes the loan funds available by either making a transfer to the school or directly to the student.
Disclosure Statement: Immediately after a loan is approved or disbursed, the lender or its agent sends a disclosure statement to the borrower that outlines how much was borrowed and under what terms.

Electronic Funds Transfer (EFT): Electronic payments and collections. Loan funds are electronically transferred to the school’s business office and students can make electronic payments on their loans.
Endorser: A person who signs for a loan agreeing to repay it.
Enrollment Status: The amount of credits a student is enrolled in for an academic year. Many loan lenders require that a student be enrolled at least half-time to qualify for a loan.
Entrance/Exit Interview: Before signing for a loan, borrowers must go through an entrance interview that outlines the borrowers’ responsibilities, gives tips and generally answers any questions about borrowing. And exit interview is conducted when students are about to graduate to make sure they understand the repayment process and other relevant topics, such as consolidation, deferment and forbearance.
Expected Family Contribution (EFC): Amount of money you are expected to contribute toward tuition expenses. This amount is calculated each year based on the family’s income and assets when you submit your FAFSA application. The EFC is subtracted from the school’s cost of attendance (COA), also known as the “student budget,” to determine your financial need: Financial Need = COA - EFC. The student budget includes tuition, fees, room and board, books and supplies, travel, and personal and incidental expenses. Your EFC will not change by school; it remains constant regardless of the COA. The lower your EFC, the more financial aid you will get. The school will try to meet this need through a financial aid package that combines aid from federal, state, school, and private sources with loans and student employment.

FAFSA (Free Application for Federal Student Aid): You need to fill out the FAFSA application every year (either online or in paper format) to qualify for aid and find out what your EFC will be. Schools use FAFSA information to determine a student’s financial aid package and offer.
Federal Family Education Loan Program (FFELP): A federal program where lenders fund loans to borrowers (different from the direct program that receives funding from the government).
Federal Methodology (FM): A formula that the federal government uses to figure out your EFC. This formula changes every two to four years. You can view the official worksheet the government uses to calculate the EFC here.
Financial Aid: Monetary assistance to pay for education.
Financial Aid Administrator: A school employee who organizes financial aid programs, works with students and lenders and is generally responsible for financial aid.
Financial Aid Transcript: A record of all financial aid a student has. Schools require students present a transcript of all financial aid programs they participated in at previous schools.
Fixed Interest Rate: Interest rate that is locked in. It remains the same throughout the life of the loan.
Forbearance: A delay or reduction in payments that you can request from your lender if you don’t qualify for deferment. Each lender has different requirements on how long you can be in forbearance. Events like medical emergencies or unemployment will usually qualify you for a forbearance.

Gift Aid: Sometimes used interchangeably with scholarships or grants, gift aid is money that does not need to be repaid.
GPA (Grade Point Average): A formula where a number represents a student’s average grade. GPA is used to determine who qualifies for merit scholarships.
Grace Period: A period of time before a lender will start to bill your for the loan your have taken out.
Grad PLUS: Launched in 2006, this is a new loan for graduate and professional students. An alternative to private loans, Grad PLUS allows graduate students to borrow up to the full cost of tuition (after subtracting other financial aid). Similar to the PLUS loan, it requires a successful credit evaluation and features no grace period (an in-school deferment is available to students who are enrolled at least half-time). Borrowers must exhaust all Stafford options before applying and using Grad PLUS funds.
Graduated Repayment: A type of repayment program where the first payments are smaller and gradually increase.
Grant: Need-based financial aid that does not need to be repaid.
Guarantee Fee: A fee that a guarantor receives for insuring a student loan. This is also known as a default fee.
Guarantor: An organization that approves and insures a federal student loan for the lender. If a borrower fails to repay a loan, the guarantor will pay the lender the money lost on the loan and begin collection procedures against the borrower.

Independent Student: A student who is not claimed as a dependent by his or her parents. Independent students don’t need to provide their parents’ financial information when applying for student loans. Graduate students are automatically considered independent students.
Institutional Loan: A loan offered through the school the student will attend.
Interest: The price charged for borrowing someone else’s money. Lenders charge interest on loans so the amount you will have to repay will be more than the principal amount you borrowed.
Interest Rate: The percentage of the amount you borrow per year that will be added on top of the principal (see Interest).

Lender: A person or organization that loans money.
Loan Principal: The loan amount that does not include the interest or any additional fees. This is the amount that you can use toward paying for college.

Master Promissory Note: A single promissory note that can be used for multiple loan requests and also outlines the borrower’s rights and responsibilities. Borrowers who fill out a Master Promissory Note for federal loans can reapply for subsequent loans with much less paperwork (see Promissory Note).
Merit Aid: Aid given to students for excellent achievement in academic, artistic or athletic fields.

Need Analysis: The process used to determine a student’s financial aid need based on information the student, the student’s parents or spouse provide. This includes tax information and income statements. You need to complete the FAFSA in order for your need to be determined.
Need-based Aid: Financial aid for which the family’s and student’s income is the main deciding factor.
NSLDS (National Student Loan Data System): The National Student Loan Data System is a centralized network that stores information on all federal student loans from schools, guaranty programs and other Department of Education programs like the Pell Grant. The database keeps track of all this information to answer any questions students in these programs may have. Private (alternative) loans are not included in NSLDS.

Origination Fee: Some lenders charge students a fee to administer a loan.

Parent Loan: Parents can take out loans to pay for their child’s education (see PLUS loan). A credit check on the parents is required to take out these loans and there is no grace period.
Pell Grant: A grant given to all students in need. The amount you will receive if you are eligible varies.
Perkins Loan: A subsidized loan available to students with financial need. The Perkins loan is offered through the college and the amount that is awarded is decided by the school. The interest rate is fixed at 5% and the loan has a 9-month grace period. During periods when the borrower is enrolled at least half-time or during eligible deferment periods no interest accrues on the loan.
PLUS Loan: Stands for “parent loan for undergraduate student.” PLUS is a loan that parents can take out to fund their dependent child’s college tuition if the student is enrolled at least half-time. It requires a successful credit evaluation and features no grace period.
Private Loan: Also known as an alternative loan, this is a loan made through private lenders (who may also be a federal lender). The eligibility for alternative education loans (or private loans) usually depends on credit score. Typically the interest rates for private loans are higher than federal loans because private loans are not guaranteed by the government.
Promissory Note: A legal contract that requires the borrower to repay a loan.

Repayment Term: The period of time during which you will be paying back your lender the money you borrowed. Repayment terms usually run anywhere between 10 and 25 years.

Scholarship: Money awarded to students in recognition of achievement that does not need to be repaid. One great way to find scholarship opportunities is through the FastWeb search engine:
SEOG (Supplemental Educational Opportunity Grant): This grant of up to $4,000 is awarded to some students in need.
Servicer: After a loan is disbursed, a servicing company will set up and handle your account all the way through repayment. The servicer will collect your loan payments and will be able to answer any questions you may have about your loan and your repayment.
Student Aid Report (SAR): After you fill out the FAFSA, the federal government sends you the SAR that outlines your EFC and how much federal aid you are eligible for. The SAR is also useful when applying for scholarships because students whose EFC is lower than the school’s COA are considered needy.
Student Loan: Unlike a grant or a scholarship, a loan is money that needs to be repaid.
Subsidized Stafford Loan: A need-based federal student loan for which the government pays interest while the student is in school or during a grace period or authorized deferment. Stafford loans are the most common kind of loans in student aid packages. Repayment of Stafford loans begins six months after the student graduates or drops below half-time enrollment. The standard repayment term is 10 years, but this can be extended or changed in several ways, including consolidation. Starting on July 1, 2007, dependent undergraduates may borrow a combination of subsidized and unsubsidized Stafford loans up to $3,500 their freshman year (up from $2,625), $4,500 their sophomore year (up from $3,500) and $5,500 for each remaining year. Independent undergraduate students and dependent students whose parents have been turned down for a PLUS loan can borrow additional unsubsidized Stafford of $4,000 the first two years and $5,000 the remaining years.

Tuition: The cost of instruction at a school. Tuition does not include room and board, textbooks and some other fees a school charges for attendance.

Unsubsidized Stafford Loan: A federal student loan for which the government does not pay interest while the student is in school (you can defer payments while in school, however). Stafford loans are the most common kind of loans in student aid packages. Repayment of Stafford loans begins six months after the student graduates or drops below half-time enrollment. The standard repayment term is 10 years, but this can be extended or changed in several ways, including consolidation. Starting on July 1, 2007, dependent undergraduates may borrow a combination of subsidized and unsubsidized Stafford loans up to $3,500 their freshman year (up from $2,625), $4,500 their sophomore year (up from $3,500) and $5,500 for each remaining year. Independent undergraduate students and dependent students whose parents have been turned down for a PLUS loan can borrow additional unsubsidized Stafford of $4,000 the first two years and $5,000 the remaining years.

Variable Interest: Unlike a fixed interest, variable interest changes periodically over the life of the loan. These interest changes can happen monthly, quarterly, semi-annually or annually, depending on the lender.
Verification: When applying for financial aid, you are often required to provide proof of your financial status. This usually includes items like W-2 forms and pay stubs.

Work Study: Employment programs available to students through schools and federal or state sponsorship to help pay their tuition and other college expenses. The funds will be made available to the student as they work the expected hours.

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