Alternative Loans (Non-Federal, Private Loans)
Educational loans that are not guaranteed by either the state or federal government. Each lender/servicer/provider develops its own program with specific interest rates, eligibility, repayment, forbearance, and deferment requirements. Generally, a borrower has to be determined to be creditworthy in order to get an Alternative, Non-Federal, Private Loan.
The process of gradually repaying a loan over an extended period of time through periodic installments of principle and interest.
A person is declared bankrupt when found to be legally insolvent and the person's property is distributed among creditors of otherwise administered to satisfy the interests of creditors. Generally, Federal student loans cannot be discharged through bankruptcy.
The person who requests and receives the benefit of the loan and who is also responsible for paying back the loan.
The addition of unpaid accrued interest to a borrower's principal balance. Subsequent interest accrues on the new total principal balance.
Refinancing multiple education loans into one new loan with a new repayment term, monthly payments and interest rate.
Federal Consolidation Loan
A FFELP Loan that allows borrowers to pay off their individual loans with the proceeds from a single loan from a single lender. A Consolidation Loan generally has a repayment period that exceeds 10 years and affords a borrower a lower monthly payment amount. Borrowers can "consolidate" all of only some of their loans. Typically, Alternative loans are not available for Consolidation.
A person who signs the promissory note in addition to the borrower and is responsible for the obligation if the borrower does not pay.
The failure of a borrower to make scheduled monthly payments according to the agreed-upon terms. Default occurs at 270 days delinquent after many collection efforts have been made. If not corrected, a defaulted loan will adversely affect one's credit and may lead to wage garnishment.
Entitlements that allow borrowers temporarily cease making payments of loan principal for a specific period of time during repayment. Under certain specified conditions, lenders must grant deferments to eligible borrowers. Because deferments defer principal payments, a borrower must be in repayment to request. Borrowers who have not used their Grace Period are not eligible for any deferments because they do not yet owe principal payments. For some loans the federal government pays the interest during a deferment. On others, the interest accrues and is capitalized, and the borrower is responsible for paying it.
Deferments, Approval Process
The act of moving a borrower from a repayment status to a deferred status.
Deferments, Requests For
These are forms approved by the Department of Education that the borrower completes to request a Deferment. Borrowers that are eligible for an "In-School" Deferment do not have to complete a form. In-School Deferments are approved and processed when the Lender receives enrollment information from the school.
The status during the repayment time period during which the borrower is approved to "defer" or delay payment on principal. Unsubsidized Stafford borrowers continue to owe interest during periods of deferment, but the interest rate may be lower than it is during the repayment period. The federal government pays the interest that accrues during a period of eligible deferment for Subsidized Stafford borrowers.
When loan payments are late or missed. Delinquency begins with the first missed payment. After 30 days, delinquency is reported to a credit bureau and can prevent the likelihood of obtaining credit in the future.
The transfer of loan proceeds by individual check, master check, or electronic transfer of funds from a lender to a borrower, the school a borrower attends, or an escrow agent. A disbursement signals that the control over the funds is changing hands.
For loans disbursed by check or master check, or draft, this is the date the Lender issues the check or master check, or draft. For loans disbursed by electronic funds transfer (EFT) or wire transfer, the date the funds are transferred from the lender to the school or escrow agent.
Providing borrowers with the specific legal and financial details about their loan. Disclosures are generally done in writing, but can be done electronically, via e-mail, or via an Internet site. Disclosures are required at the time a loan is disbursed and at the time the loan enters repayment. Disclosures generally contain the applicable interest rate for the loan, the amount of any capitalized interest, the old and new principal balances, the amounts of any fees deducted from the loan amount, and information about how to contact the Servicer.
If a borrower fails to make payments on their loan according to the terms of the promissory note, the federal government requires the lender, holder or servicer of the loan to make frequent attempts to contact the borrower (via telephone and mail) to encourage him or her to repay the loan and make arrangements to resolve the delinquency.
Electronic Funds Transfer (EFT)
Any transfer of funds that is initiated through electronic means, such as data transmission by computer rather than a paper based transaction, such as a check.
Another creditworthy person who may be required to sign the promissory note. The endorser is obligated to pay the loan if the borrower does not.
Enrollment, Period of
The period for which aid is made as determined by the school. A period of enrollment coincides with an academic term such as the academic year, semester, trimester, or quarter, and starts on the day classes begin.
An indication of whether you are a full-time or part-time student. Generally you must be enrolled at least half-time (and in some cases full-time) to qualify for financial aid.
Counseling sessions held by the school before a student receives a loan and when the borrower leaves school. Information is provided so the student can learn more about opportunities as well as the responsibility to repay, and the consequences of failure to do so. It is an opportunity for the student to learn more about repayment and deferment options.
Federal Family Education Loan Program (FFELP)
Education loans made by private lenders, which are guaranteed by the state agencies or non-profit organizations. These guarantees are reinsured by the federal government. FFELP includes Federal Stafford, Federal Unsubsidized Stafford, Federal PLUS (for parents), and Federal Consolidation Loan Programs.
A letter sent by the lender to the borrower, demanding payment in full of a delinquent account. This letter is sent at least 30 days prior to the date the lender will file a claim.
An authorized period of time during which the borrower is permitted to temporarily cease making payments or reduce the amount of the payments. The borrower is liable for the interest that accrues during the forbearance period.
Unless a borrower meets the specific requirements for a Mandatory Forbearance, the granting of forbearance is at the lender's Discretion.
Generally, a six-month period that begins on the day after the borrower ceases to be continuously enrolled at least half-time at an eligible school and ends six months to the day later. The Repayment Period begins the day following the end of the Grace Period. This six-month grace period is for FFELP loans only, Alternative loans grace period may vary.
A predetermined fee charged to the borrower (an insurance premium). Usually, one percent of the loan proceeds is deducted prior to disbursement of funds. The money is used by the guaranty agency to insure the lender against loss due to death, total permanent disability, or borrower default.
A State or private nonprofit organization that has an agreement with the Secretary of Education to administer a loan guarantee program. Administering a loan guarantee program includes, but is not limited to, providing the owner of the note with the guaranty that they will be paid any eligible unpaid principal and interest in the event that the borrower fails to repay according to the terms of the promissory note, or if the borrower dies, defaults, or meets certain other requirements specified in federal statutes.
Enrollment at a participating school that equals at least half the academic workload of a full-time student, as determined by the school, and is not full-time.
The lending institution that owns the promissory note (loan contact). The holder may be the original lender, another lender to whom the loan was sold, or a secondary market that purchased the loan. Should the loan default, the guaranty agency becomes the holder.
In-School & Grace Interest Subsidy
Interest the federal government pays on certain loans while borrowers are in school, during authorized deferment, or during grace periods.
The period of time during which the loan borrower is continuously enrolled at least half-time at an eligible institution. The day after the borrower ceases to be continuously enrolled at least half-time, the loan enters the grace period.
The amount of money charged the borrower for the use of the lender's funds. Interest is charged on the unpaid principal balance of the loan for the number of days that the borrower has use of the funds. Interest can be charged up to the maximum percentage allowed by the Act. During the In-School, Grace, and Deferment periods, the Federal Government may pay the interest on behalf of the borrower. During the Repayment Period and periods of Forbearance, interest is owed and payable by the borrower. The interest rate may be lower during the In-School, Grace, and Deferment periods than it is in the Repayment period. Interest is sometimes best explained as "rent on the money borrowed." Interest Rates on FFELP loans change annually on July 1.
Interest, Capitalization of
Addition of unpaid interest to the principle balance of a loan which increases the total outstanding balance due. This occurs at the end of a forbearance on subsidized loans and at the end of a deferment, a forbearance or grace period on unsubsidized loans.
With a variable interest loan, the interest rate changes periodically. For example, the interest rate might be pegged to the cost of US Treasury Bills (T-Bill rate) and be updated monthly, quarterly, semi-annually or annually.
A bank, financial institution, agency, school or other lending institution that provides the actual funds for the student loan.
A type of financial aid that is available to students and their parents. Student loan programs have varying interest rates and repayment provisions. An education loan can have single or multiple disbursements and must be repaid.
Loan Amount (Amount Borrowed)
The gross amount of the loan before any fees are deducted.
The total unpaid amount of the specified loan. This figure includes outstanding principal, capitalized interest, accrued interest and fees.
The procedures necessary to process a loan application, obtain the guarantee, and disburse loan proceeds to the school. Origination can be done by the lender, or by a contractor on behalf of the lender.
The period of enrollment for which a loan application is certified.
The net amount of the loan funds after all fees have been deducted. The amount of money the borrower actually receives. For example: A borrower is granted a loan in the amount of $2,625. After the 3% federal fee is deducted in the amount of $78.75 and the 1% "guaranty fee" is deducted in the amount of $26.25, the loan proceeds are $2,520. The borrower, however, actually owes $2,625. The principal balance of the loan is $2,625, and interest accrues on the $2,625.
Work that promotes satisfactory repayment of the loan. Servicing includes student status tracking, documentation, record keeping, billing, payment processing, customer service, reporting to credit bureaus, and reporting to the federal government. Servicing can be preformed by the lender or by another entity contracted by the lender.
Describes the current status of a borrower's loan. It can be one of the following: In-School- The period of time in which you are enrolled on at least a half-time basis and have never gone into repayment on the loan. In Grace- The period of time from when you leave school until you begin repayment. On Stafford loans, this time period is 182 days (approx. 6 months). Repayment- The time during which a borrower actively pays back and education loan. Deferment- Monthly payments are suspended when the loan is in any type of deferment. Forbearance- Monthly payments are suspended when the loan is in forbearance. Claim- The loan is 270 days past due and is in 'default'. A request for reimbursement has been filed with the guarantor. Derogatory credit reporting occurs. Paid by Claim- The loan has been purchased by the guarantor. All inquires will need to be directed to the guarantor of record for the loan. Paid in Full- The loan obligation has been satisfied.
Master Promissory Note (MPN)
A Stafford (subsidized and unsubsidized) promissory note that is the student borrower's promise to repay the loan funds. The MPN may be used as a single year or multi-year note if the student is attending a 4-year or graduate school. When using an MPN, the student applies for a Stafford loan, either by using the Free Application for Federal Student Aid (FAFSA) or an alternative paper or electronic school financial aid application process. The MPN replaces the common application and is used for 10 years to initiate multiple serial disbursements without the necessity of an additional signature.
Process by which the school, lender, or guarantor (on behalf of the school or lender) notifies the student of the proposed loan type and amounts. The student is required to take action to accept, reject, or adjust the type or amount of the loan.
A predetermined percentage (may not exceed 3%) of a student loan that the lending institution withholds, on behalf of the federal government, to offset the administrative costs of the student loan program. For private/alternative loan programs, the origination fee is generally paid to the originator to cover the cost of administering and insuring the program.
The period from the time that the student/borrower requests a loan until the loan funds are disbursed or returned to the lender.
Plain English Disclosure
This disclosure explains how the statute sets the interest rate on each loan. It also provides the borrower with a plain summary of key disclosure items from the original Master Promissory Note form and the Borrower's Rights and Responsibilities statement. The summary is to help students understand and manage their subsequent borrowing under the Master Promissory Note.
PLUS (Parent Loans for Undergraduate Students)
Creditworthy parents are able to take out a federally-insured, low-interest loan to cover the cost of education for their dependent, undergraduate children. The parent is always the borrower on a PLUS loan, and therefore responsible for making payments on the loan.
Making loan payments before the due date. All or part of a student loan may be prepaid without incurring a penalty. This is also known as "Accelerated Payment."
The outstanding balance of the loan on which interest is charged. The starting principal balance is the full loan amount including all fees. Capitalized interest becomes part of the loan's principal balance. When a borrower makes a loan payment on a loan that is in Repayment, accrued interest is deducted from the payment, and the balance of the payment reduces the unpaid principal.
The difference between what the borrower paid toward school charges (including financial aid and/or cash paid) and the amount the school can retain under the appropriate refund policy. Refunds generally occur when a borrower drops out or reduces his/her enrollment under half-time.
Rehabilitation (of a defaulted loan)
A process by which a borrower may bring a FFELP loan out of default by adhering to specific repayment requirements.
The process by which a lender requests payment from a guarantor for a defaulted loan.
Reinstatement (of borrower eligibility)
A process in which a borrower with a defaulted FFELP loan may regain Title IV eligibility by adhering to specific repayment requirements.
The period during which regular monthly payments of principal and interest are required.
The terms, number of months, and payment amount for repaying the loan. Borrowers can elect to repay their loans under either a fixed (same monthly payment each month until the loan is paid in full), graduated (monthly payment increases at specific times until the loan is paid in full), or, if eligible, income sensitive (payment amount is calculated based on the borrower's circumstances but must be equal to or greater than the monthly interest accrued) repayment plan.
Organization that administers and collects loan payments. May be either the loan holder or an agent acting on behalf of the holder.
Statutory Eligibility Requirements
The Higher Education Act specifies the specific conditions the borrower must meet in order to be granted a deferment. The Act also specifies the maximum time period for each type of deferment (see also Deferment).
Subsidized Federal Stafford Loan
A "subsidized" need-based loan means the federal government will pay the loan interest to your lender during the time you are in school and during the six-month grace period. This financial support reduces the cost of the loan so current resources can be applied to current educational costs. To qualify for interest subsidy, one must apply for financial aid, demonstrate financial need, and receive a loan.
Loan proceeds that the school returns to the lender prior to cashing the check/negotiating the funds, or applying the funds to the student's account (i.e., EFT transaction). This also includes checks that have been released by the school to the borrower that remain uncashed for 120 days following disbursement by the lender.
A period of time during which the borrower is unemployed or employed less that full-time and meets other requirements during which no principal payments are due on his/her loan.
Unsubsidized Federal Stafford Loans
An "unsubsidized" student loan means the borrower (not the federal government) will pay the loan interest to the lender, either monthly or quarterly. The interest can also be capitalized by the lender quarterly, semiannually, annually, or one time just prior to entering repayment.
Variable Interest Rate
With a variable interest loan, the interest rate changes periodically. For example, the interest rate might be tied to the cost of US Treasury Bills (i.e., T-Bill rate) and be updated monthly, quarterly, semi-annually or annually.