Conquer your student debt. Refinance now.
Have you ever read a financial document, only to realize you’re unsure of what 50% of the words mean?
Loan terminology can be confusing, especially if you’re new to the application process or borrowing money for the first time. Below are some common terms that could show up in your loan documents, and their definitions, that are important to know before signing.
10-Day Payoff Letter: A 10-day payoff letter is a crucial part of a student loan refinance. During a refinance, your new lender needs to pay off all the loans held by your old lenders before they disburse your new loan. The payoff process takes around 10 days and interest on your old loans accrues daily. The 10-day payoff letter is an estimate of how much you owe on your old loans plus 10 days’ worth of interest, so that when your new lender pays off your old loans 10 days later, they pay the exact amount and the balance owed to your old lenders will be $0.
Accredited Institution: A postsecondary institution that has been evaluated and meets the general standards set by the peer review accreditation boards.
Accrue: The accumulation of interest and applicable fees on a loan’s principal balance.
Amortization: The gradual repayment of a debt by periodic (usually monthly) installments of principal and interest.
Annual Percentage Rate (APR): A percentage rate that represents the total cost of taking out a loan. The APR includes not only the interest rate, but also other costs or fees that may be charged by the lender (if applicable).
Application Fee: A charge payable to the lender up front when a borrower submits a loan application. Loan application fees are usually non-refundable and vary depending on the type of loan program.
Automated Clearing House (ACH): An electronic funds-transfer system that facilitates money transfers between participating bank accounts and lenders.
Balloon Payment: Typically a lump-sum payment that’s paid at the end of a loan’s term, and is often significantly higher than any of the preceding payment amounts. Balloon payments are often made when paying off a loan, and may be used to lower the amount of your earlier payments. Auto loans, home loans, and business loans may also include a balloon payment.
Borrower: The person who is legally responsible for the loan.
Capitalized Interest: When unpaid interest is added to a loan’s principal balance at the end of a borrower’s grace period, forbearance, or deferment. From that point on, the loan’s interest payment will be calculated using this new principal balance.
Charge-Off: Declaration by a creditor that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent and/or defaults on a debt.
Co-Borrower: Someone who agrees to be jointly responsible for repaying the loan with you, and shares equal ownership and liability. Both parties typically make loan payments, and lenders use the borrower’s and co-borrower’s credit and income information to determine loan eligibility.
Collateral: An asset(s) that a borrower offers to a lender in a secured loan. The lender can take possession of the collateral if the borrower defaults on the loan.
Collections Agency: If a borrower is delinquent and/or defaults on a debt, the lender can pass it off to a debt collection agency for collection activities.
Consolidation: When multiple loans are combined so that the borrower only makes one payment.
Cosigner: Someone who signs a loan along with the borrower and accepts legal responsibility for paying the debt if the borrower defaults or does not pay.
Credit Bureau: An agency that collects and researches individual credit information and sells it to businesses who have a permissible purpose for receiving the information, such as lenders or employers. The three main credit bureaus in the US are Equifax, Experian, and TransUnion.
Credit History: A record of how well (or poorly) a borrower has managed and repaid debt in the past – which includes the number and types of loans they have taken out, and the timeliness of payments. It is a primary component of a borrower’s credit report, and significantly influences their credit score.
Credit Report: A record of a borrower’s debt and payment history.
Credit Score: An estimate of a borrower’s creditworthiness represented as a numerical value. *See FICO Score
Cost of Attendance: The cost for one academic year of full-time education at a college or university, including tuition, fees, housing, meals, books, supplies, and other expenses.
Current Amount Due: Generally, the minimum monthly payment amount that must be made by the due date, not the total amount owed.
Debt-to-Income Ratio: The amount of debt a borrower has compared to their income. This is a standard item a loan officer will look at to determine whether a borrower is eligible for a loan.
Default: Failure to make the agreed-upon periodic payments on a loan after a number of days in delinquency, or as defined by the lender.
Deferment: A temporary postponement of payment on a loan. For some federal loans, interest may not accrue during this period.
Delinquency: A loan becomes delinquent when loan payments are not received by their respective due dates.
Direct PLUS Loan: Federal loans available to students pursuing graduate or professional degrees, or to parents of dependent undergraduate students. Direct PLUS loans can be used to help pay for education expenses. PLUS loans typically have a fixed interest rate and are not subsidized.
Discharge: When a borrower is released from a loan obligation.
Disbursement: The act of paying out or disbursing money.
Down Payment: Money a borrower pays up front on a large purchase, such as a car or home. The down payment is usually a percentage of the total purchase price, with the remaining balance to be paid later. The size of a borrower’s down payment may be affected by the current debt they hold compared to their income (DTI ratio). The less debt they’re in – credit card debt, student loan debt, etc. – and the higher their income, the more likely they are to secure favorable terms for a down payment.
Enrollment Status: Indicates whether the borrower’s status is full-time, three-quarter time, half-time, less than half-time, withdrawn, graduated, etc as defined by each school. If a student’s enrollment status drops to less than half-time, the student’s loans may be eligible to enter repayment.
Escrow: An account where funds are held in trust, generally by a neutral third party, before they are transferred from one party to another. Escrow is commonly associated with real estate transactions, where money is held in a specific account until the sale of a home is complete. Similarly, student loan proceeds may be transferred from a lender to a borrower, college or university, or escrow agent. Escrow is typically used when there is uncertainty that the involved parties will be able to fulfill their financial obligations.
Extended Repayment: A loan repayment plan that enables a borrower to make lower monthly payments over a longer period of time than the standard 10-year repayment term available for most student loans. With an extended repayment plan, monthly payments can be:
- in fixed or graduated amounts
- made for up to 25 years
- typically lower than those required under the Standard or Graduated repayment plans
Federal Loan: A loan offered by the US Department of Education.
Finance Charges: The cost to borrow money. Finance charges may include interest, as well as lender fees, such as late and service fees.
Fixed Interest Rate: The interest rate of the loan will stay the same during the term of the loan.
Free Application for Federal Student Aid (FAFSA): The paperwork a student needs to fill out each year they attend an institution of higher ed, which will help determine if the student is qualified for a federal financial aid package, federal grants, work-study, and/or loans.
FICO Score: One popular model to calculate a borrower’s credit score. FICO stands for the Fair Isaac Corporation, the company that came up with the methodology for the FICO score. Scores range from 300 to 850.
Forbearance: A period during which a borrower’s monthly loan payments are temporarily suspended or reduced, but interest continues to accrue.
Grace Period: A period of time after a student graduates or stops attending school as a full-time student before the student is required to make payments on their student loans.
Graduated Repayment: A repayment program for borrowers who expect their income to rise over time. Payments start lower, then increase every two years. All federal student loan borrowers are eligible for a graduated repayment program.
Gross Income: The total amount of income earned before taxes or paycheck deductions. Lenders typically use gross income to determine loan eligibility and the amount they’ll loan to a borrower. Specifically, lenders will look at a borrower’s debt-to-income (DTI) ratio, or how much debt they have compared to their gross income.
Hard Credit Pull: An inquiry that occurs when a prospective lender checks a potential borrower’s credit report to make a lending decision. Hard inquiries can temporarily lower a borrower’s credit score and will typically stay on a credit report for two years.
Interest: Money paid regularly at a particular rate for the use of money lent.
Interest Rate: The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
Income-Driven Repayment Plan: An option for federal borrowers that sets up a borrower’s monthly student loan payment at an amount that is intended to be affordable based on the borrower’s income and family size. There are four different income-driven repayment plans offered by the federal government:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan)
- Pay As You Earn Repayment Plan (PAYE Plan)
- Income-Based Repayment Plan (IBR Plan)
- Income-Contingent Repayment Plan (ICR Plan)
Interest-only Loan: A loan that requires the borrower to pay only the interest during the term of the loan, then repay the principal when the loan term ends.
LIBOR: The one-month London Interbank Offered Rate (LIBOR) rate is the rate of interest at which banks offer to lend money to one another and is commonly used as the reference rate for student loans.
Lender: The organization that gives a borrower a loan. For federal student loans, this is the Department of Education. Private lenders could include banks, credit unions, schools, etc.
Loan Agreement: A written contract between a borrower and the lender that includes the total loan amount, the terms (i.e., the amount of time allotted to repay the loan, the interest rate, the total repayment amount, late charge amounts, what happens if a borrower defaults, etc.), and how to repay the loan.
Loan Application: The document borrowers fill out to apply for a loan. It typically includes information such as the borrower’s monthly income, current debts, and other relevant financial and personal information requested by the lender.
Loan Balance: The outstanding amount owed on a loan, including interest.
Loan Limit: The maximum amount a lender will loan to a borrower. A loan limit is typically based on a borrower’s income, creditworthiness, and debt-to-income (DTI) ratio.
National Student Loan Data System (NSLDS): The U.S. Department of Education’s database for student aid.
Net Income: A borrower’s income after paying applicable taxes and pre-tax deductions, also known as “take-home pay.”
Non-Sufficient Funds: Case in which there are not enough funds in a checking/savings account to pay for the cost of something/make a full payment. Some institutions may charge additional fees for payments that fail due to non-sufficient funds.
Origination Fee: Student loan origination fees vary by loan type. Lenders typically charge borrowers a fee to cover their costs for processing and disbursing loan funds. Origination fees can significantly increase student loan costs for student and parent borrowers. They are also common in other types of loans, such as auto loans, mortgage loans and home or real estate loans. The origination fee is typically deducted from the total loan amount.
Overdraft: Case in which there are not enough funds in a designated account and the financial institution transfers the balance to cover the cost of something from another account and assesses a fee for the service.
Pay-off: The total amount owed to a lender to completely pay off a loan as of a certain date.
Personal Loan: Any sum of money that is lent to a consumer for personal expense purposes.
Prepayment Penalty: A fee lenders charge borrowers who pay off all or part of their loans ahead of schedule, such as before the repayment period ends.
Prime Rate: The underlying index rate used to set the interest rates for many types of loans, including credit cards, auto and personal loans, and home equity loans and lines of credit. The prime rate is often the best interest rate that major banks offer their most creditworthy borrowers. Banks will typically set their own prime rates, although they tend to move in tandem with the benchmark interest rate set by the Federal Reserve. Federal student loan borrowers don’t have to worry about the Prime Rate, because the interest rates are fixed, meaning they don’t change over the life of the loan. However, borrowers who have variable interest loans from private lenders may be impacted by shifts in the Prime Rate, as the interest rates on these loans may change when market rates do.
Principal: The amount borrowed less any interest and/or other charges.
Private Loan: A loan offered by a lending institution that is not part of the federal government.
Promissory Note: A contract between the lender and the borrower which states that the borrower will repay the loan as agreed upon in the terms of the contract.
Refinancing: The process of replacing an existing loan with a new loan. Borrowers may refinance their loans in order to get a lower interest rate and/or potentially make one monthly payment as opposed to multiple payments to various servicers.
Secured Loan: Loans that are protected by an asset or other collateral.
Servicer: An organization that acts on behalf of the lender to administer its loan portfolio. Some lenders also service their loans, but the federal government works with private servicing agencies.
Soft Credit Pull: An inquiry that occurs when a company checks a potential client’s credit report as a background check before a lending decision. Soft inquiries don’t affect a potential borrower’s credit.
Standard Repayment: Unless otherwise specified, the standard student loan repayment period is 120 months, or 10 years. Generally, the payment amount remains the same throughout the term of the loan.
Subsidized Loan: A federal loan where the borrower does not pay the pay interest that accrues during a borrower’s grace period. Subsidized loans are awarded on the basis of financial need, which is determined by the borrower’s FAFSA information.
Term: Typically refers to the loan repayment period. In other words, the amount of time a borrower has to repay a loan.
Title IV: Funds allocated for Federal student financial aid. Schools granted Title IV status are accredited by the Department of Education to participate in federal student financial aid programs. The government permits students to apply for Title IV funds to assist with the cost of college tuition and related expenses. Students must complete the Free Application for Federal Student Aid (FAFSA) to obtain Title IV funds.
Underwriting: The process a lender uses to evaluate their financial risk in loaning money to a borrower. Most lenders and loan programs have a minimum set of underwriting requirements borrowers must satisfy to qualify.
Unsecured Loan: Loans that are not protected by an asset or other collateral.
Unsubsidized Loan: A loan where the borrower is responsible for any interest accrued during the loan term, including the grace period.
Variable Interest Rate: A variable rate may start out lower than a fixed rate, but it may fluctuate over the life of the loan as its underlying reference rate changes. *See LIBOR