Accrue Interest on student loans typically begins accumulating as soon as the loan is disbursed. The borrower is responsible for paying all accrued interest except on subsidized loans—when the loans are in a deferred status. Interest payments are not required until after the grace period ends and when the loan is in a deferred status. AGI Your income after certain allowable adjustments from your total income. This figure is used to calculate a borrower’s monthly student loan payment under income-dependent repayment plans. AWG The situation where holders of defaulted loans can, without your consent, require employers to withhold up to 15% of the wages from your paycheck. The withholdings are applied to the balance owed until your student loans are paid or removed from default. AmeriCorps A national organization that offers volunteer opportunities through a network of partnerships with local and national nonprofit groups. In addition to receiving education awards, borrowers who volunteer through AmeriCorps are eligible for forbearance and do not have to pay interest that accrues on their student loans during their service. Amortization The process of paying off a debt (often from a loan) in full over time through regular, fixed payments. A portion of each payment is for interest while the remaining amount is applied towards the principal balance. ANN A career field or area of study defined by the federal government as one of national need. Student loan borrowers who pursue one of these fields may qualify for public service loan forgiveness. Fields of study include biology, chemistry, computer and information sciences, engineering, mathematics, nursing, and physics. Automatic payment A payment that is made through authorized, direct withdrawals (debit) from a checking or savings account. Some lenders may offer interest rate discounts for student loan borrowers who agree to this arrangement. Bankruptcy A legal status that grants individuals or institutions protection from creditors. Those who file bankruptcy can have the court discharge some or all of their debt (generally, student loans are not considered a dischargeable debt). The process varies depending on whether a Chapter 7 or Chapter 13 bankruptcy is filed. Bankruptcy plan Chapter 13 bankruptcy involves a court-ordered "plan" to repay most or all debts within a 3- to 5-year period. This is also known as the "wage earner’s plan." Plan payments are made directly to the bankruptcy trustee, who then distributes payments to creditors in accordance with the plan. Borrower The individual who receives a loan and is obligated to repay the debt, even if the loan was taken out on someone else’s behalf, as in the case of a parent borrowing a PLUS loan to pay for a dependent student’s education. Cxl Refers to cancellation or forgiveness of certain federal student loans under certain conditions, such as total, permanent disability and death. This also includes programs where borrowers serve as volunteers or work in certain occupations in areas where there are shortages of qualified workers (e.g., teachers). Capitalization The practice of adding unpaid accrued interest to the principal balance of a loan, thereby increasing the size of the loan. Interest then continues to accrue on the new balance. Capitalized interest The unpaid interest that accrues on a loan and is added to the principal balance. Chapter 7 A type of bankruptcy that involves liquidating a person’s assets and using the proceeds to pay back creditors. Most or all of any remaining debt is then discharged. Currently, student loans are not a dischargeable debt except in rare cases. Chapter 13 A type of bankruptcy that involves a court-ordered plan through which an individual makes regular payments to the bankruptcy trustee over the course of 3 to 5 years. The trustee then makes payments to creditors, including student loan creditors, provided for in the plan. Student loan borrowers who file for Chapter 13 bankruptcy may not make voluntary payments on their student loans without the explicit approval of the trustee. Cohort default rate The percentage of borrowers who default on their loans early in repayment. The U.S. Department of Education compiles cohort default rates for each higher education institution, lender and guaranty agency to monitor their effectiveness in default prevention among student loan borrowers. Collection The effort made to recover a debt that is overdue or in default. A student loan borrower whose loans are delinquent is subject to collection and those in default will be subject to statutory collection costs, which are added to the outstanding student loan balance. Collection agency A company that attempts to recover a debt that is in default, on behalf of the institution that holds the loan (such as a lender or guaranty agency). A collection agency will continue to contact a borrower about his or her defaulted student loans until the loans are moved out of default through loan rehabilitation or some other payment arrangement with the loan holder. Consolidation The process of combining multiple loans into one new loan with a single interest rate, all in one monthly payment. Consolidation allows borrowers to extend the loan term to 30 years, depending on the loan balance. The interest rate on a consolidated student loan is typically the weighted average of the interest rates for the individual loans. Consolidation loan A loan that results from consolidating multiple student loans into one. The interest rate on a consolidation loan is typically the weighted average of the rates for the individual loans. Contact your lender to determine if consolidation is right for you. Credit bureau A company that rates the ability of an individual to manage credit and repay debt, based on debt and payment information provided by groups like utility companies and banks. Whether that person is considered a good or bad credit risk determines their ability to obtain future credit and loans and often impacts their cost of borrowing money. Credit bureaus report student loan default for 7 years, which can severely limit a borrower’s ability to take out additional loans. The four major credit bureaus are Equifax, Experian, Innovis, and TransUnion. To correct errors to a credit report, contact these four groups. Credit rating/credit score The rating system used by credit bureaus to measure an individual’s ability to manage debt. It is based on various criteria such as payment history and the number of open credit accounts. Credit ratings are even used by some companies to determine a person’s eligibility for employment. Student loan default remains on a credit report for 7 years, which can impact an individual’s ability to borrow money for other purchases. Those with a low credit rating often pay higher interest rates on borrowed funds. Debit A transaction in which a monetary amount is subtracted (authorized withdrawal) from a checking or savings account, as with automatic payments. Some lenders offer interest rate discounts on student loans for those who choose to repay their loans via debit transactions like automatic payments. Default Student loan default is a state of delinquency on student loans occurring when a borrower has not made a payment or payment arrangements on the student loan debt. Federal Family Education Loan (FFEL) Program student loans are considered to be in default after 270 consecutive days of missed payments; default under the Direct Loan Program is 330 consecutive days of missed payments. (Please note: As of July 1, 2010, new federal student loans will originate only through the Direct Loan Program.) Default is an extremely negative credit report entry that can affect your ability to get credit cards and loans as long as the loans are in default. Your lenders may send your loan to collections or sue you if your student loans go into default. Defaulting also takes away one’s eligibility for Title IV financial aid. If you've defaulted on your student loans, contact your lender to find out how you can bring your student loans current again. Default fee A small percentage of a loan (typically 1%) that the borrower pays to a guaranty agency to insure the loan against default. Generally, the federal default fee is deducted from your loan proceeds. Deferment An authorized postponement of student loan payments granted by the lender. Deferment is an option for borrowers who meet certain requirements. While in deferment, borrowers do not make principal payments on their loans. There are several types of deferments, covering a variety of situations like unemployment, active military service and parental leaves from school. Delinquent The status of a loan on which the borrower has failed to make one or more full payments on or before the payment due date. Delinquent student loans are subject to late fees and credit bureau reporting, which can impact a borrower’s ability to obtain additional loans. Dependent As it relates to financial aid, whether or not a student is considered dependent or independent serves as a basis for determining whose income is used to calculate financial need and the amounts awarded as financial aid—the student’s income or the parent’s. "Dependent" also comes into play in determining family size for income-dependent payment options. In that context, a dependent is someone who lives with you and for whom you provide more than 50% support. Support can include living expenses and payment of college costs. DLP Also known as the William D. Ford Federal Direct Loan Program, the Direct Loan Program provides Stafford loans (subsidized and unsubsidized), PLUS loans and consolidation loans that are funded directly by the federal government. Schools work directly with the U.S. Department of Education to approve and receive loan funds on behalf of borrowers. As of July 1, 2010, all new federal student loans will be originated through this program. Disbursement The process by which a lender transfers student loan funds, typically to the school directly, for the benefit of a borrower. Interest usually begins accruing on loans as soon as the funds are disbursed. Note: Interest does accrue on subsidized loans upon disbursement, but the federal government pays it. Discharge A court action that releases an individual’s personal liability on certain debts. Debtors who file for bankruptcy and meet the requirements of their specific case can receive a discharge order from the court for debts considered "dischargeable," a classification that rarely includes student loan debt. This discharge order prevents creditors from taking any legal action to collect the discharged debts. Discretionary income Generally refers to funds that are not needed for living expenses or other necessary financial obligations. ERP A loan repayment option for student loan borrowers who received their first Federal Family Education Loan (FFEL) Program loan after October 6, 1998, but before July 1, 2010, and who have a combined loan balance of at least $30,000. Under this plan, the repayment period can be extended up to 25 years, lowering monthly payments but increasing the total cost of the loan. Extra payment A loan payment made in addition to regularly scheduled payments. Making a voluntary or extra payment on a loan balance will reduce the total amount ultimately repaid, because it reduces the principal balance on which interest accrues. Borrowers must request that extra payments are applied as a payment against the principal balance, or payments will likely be applied to accrued interest if a balance exists. FAFSA The FAFSA (Free Application for Federal Student Aid), is the first step in the financial aid process. A borrower uses it to apply for federal student financial aid, such as the Pell Grant, student loans, and college work-study. In addition, most states and schools use FAFSA information to award their financial aid. Federal loans Loans issued in accordance with the U.S. Department of Education through the Federal Direct Loan Program (as of July 1, 2010, federal student loans will no longer be issued through the Federal Family Education Loan Program). Borrowers must complete the Free Application for Federal Student Aid (FAFSA) to be considered for these loans, which offer more protections and typically lower interest rates than private loans. FFEL A federal student loan program in which funds come from private lenders, such as banks and credit unions. Schools work with both student loan guaranty agencies and lenders to approve and receive student loan funds. As of July 1, 2010, new federal student loans will no longer be guaranteed or disbursed through this program. Federal Student Aid An office under the U.S. Department of Education that provides information about federal student loan programs and administers these programs to eligible borrowers who have completed the Free Application for Federal Student Aid (FAFSA). Financial or economic hardship Eligibility for an economic hardship deferment is based on a formula that compares your income to 150% of the federal poverty line for your family size. Fixed cost Refers to a fee that does not vary, such as an origination fee or default fee. Forbearance A temporary postponement or reduction of payments over a set period of time. Unlike deferments, forbearances are granted at the discretion of the lender (except where the borrower qualifies for a Mandatory Forbearance), and borrowers are responsible for the interest that accrues on all loans—including subsidized loans—during forbearance. Forbearances are normally used when the borrower does not qualify for a deferment. Forgive A program through which the federal government cancels all or part of a federal student loan debt. To qualify for loan forgiveness, borrowers must meet established criteria, including total, permanent disability; death; certain types of volunteer work; military service; teaching or medical practice in certain types of communities; or work in other occupations as specified by the forgiveness program. FAFSA2 The FAFSA is the first step in the financial aid process. A borrower uses it to apply for federal student financial aid, such as the Pell Grant, student loans, and college work-study. In addition, most states and schools use FAFSA information to award their financial aid. Garnish wages Also known as administrative wage garnishment (AWG), holders of defaulted loans can, without your consent, require your employer to withhold up to 15% of your wages. The withholdings are applied to the balance owed until your student loans are paid or removed from default. Grace period The period of time after graduation, withdrawal from school or dropping below half-time enrollment, during which borrowers are not obligated to make payments on student loans. The grace period is 6 months for Stafford loans and 9 months for Perkins loans. Repayment commences at the conclusion of the grace period. While PLUS loans do not have a grace period, borrowers may request a 6-month, post-enrollment deferment or forbearance. GRP A 10-year term repayment plan, under which the monthly payment starts out lower and increases every two years. This plan is a good option for borrowers who expect their income to increase during the repayment period. The total cost of the loan will be higher due to lower principal payments in the first years of repayment, resulting in more accrued interest. Grant Financial aid that does not have to be repaid. The best-known example is the federal Pell Grant. Guarantee An agreement to purchase the title to a loan if the borrower of the loan fails to meet his or her obligation to repay the debt. Guaranty agency An agency that guarantees or insures federal loans (such as Stafford, Consolidation and PLUS loans) through the Federal Family Education Loan (FFEL) Program on behalf of the U.S. Department of Education. Guaranty agencies also provide a variety of services to assure compliance and prevent loan defaults. Also known as guarantors, these agencies pay the lender if the borrower does not repay the student loan due to death, default, disability or bankruptcy. The federal government then reinsures the guarantor of these loans. As of July 1, 2010, guaranty agencies will no longer insure new loans through the FFEL Program; all federal student loans will be issued through the Federal Direct Loan Program. Hardship Eligibility for an economic hardship deferment is based on a formula that compares your income to 150% of the federal poverty line for your family size. IBR A loan repayment plan available in the FFEL or Direct Loan Program to federal student loan borrowers (excluding parent PLUS loans or any loans currently in default) who demonstrate "partial financial hardship." This hardship criteria is met when the borrower’s loan payments exceed 15% of that portion of his or her adjusted gross income (AGI) that is more than 150% of the poverty line (based on family size). A borrower’s monthly IBR payment is calculated as the household Adjusted Gross Income minus 150% of the poverty level for the borrower’s family size times 15%, divided by 12. The monthly payment amount is recalculated annually to reflect changes in a borrower’s income and family size as well as any change in the federal poverty level. ICR A loan repayment plan available in the Direct Loan Program. ICR is available even for PLUS loans and if a borrower’s loans are defaulted or were previously in the FFEL Program. A borrower’s ICR monthly payment is calculated as the household Adjusted Gross Income minus 100% of the poverty level for the borrower’s family size times 20%, divided by 12. The monthly payment amount is recalculated annually to reflect changes in a borrower’s income and family size as well as any change in the federal poverty level. ISR An alternative repayment plan available only for loans issued through the Federal Family Education Loan (FFEL) Program prior to July 1, 2010. Monthly payment amounts are set based on a percentage of the borrower’s monthly gross income, with a maximum repayment period of 10 years. On an annual basis, monthly payment amounts are adjusted according to changes in gross income. Interest A percentage that is calculated against a dollar amount and then added to the total balance. Where loans are concerned, interest is the amount charged to borrow funds and is therefore the primary cost associated with borrowing money. The percentage amount, or interest rate, can be fixed (unchanging) or variable (changing with the market). IRS A federal government agency that administers United States tax laws. Lender An institution that provides loans, or borrowed funds, to other individuals or institutions for a fee. Under the Federal Family Education Loan (FFEL) Program, the lender could be a bank, credit union or other private lending institution. In the Federal Direct Loan Program, the lender is the federal government. Loan Borrowed funds that must be repaid. In the case of student loans, the borrower is either the student or a parent. Federal student loans offer borrowers better terms and conditions, while private student loans carry higher interest rates and offer fewer repayment options. Loan holder The institution that holds the title to a loan and therefore has a right to collect on that loan. The holder of Federal Family Education Loan (FFEL) Program loans may be a lender, a guaranty agency, or the U.S. Department of Education (Department). The holder of Perkins loans may be a school or the Department. The holder of Federal Direct Loan Program loans is the Department. Loan rehabilitation A program offering borrowers an opportunity to bring their loans out of a default status and repair the negative credit information reported to credit bureaus. Payment amounts are set at a reasonable rate and borrowers must make nine consecutive on-time payments over a 10-month period. Nonexempt In bankruptcy cases, this refers to assets that the individual filing for bankruptcy is required to hand over to the bankruptcy trustee. Common examples of nonexempt assets include tax refunds, bank accounts, jewelry, antiques and collectibles, and other personal property. NSLDS A centralized federal student loan database that contains information on all Title IV federal student loans and financial aid. Borrowers can access this information online using the Personal Identification Number (PIN) they obtained to receive federal student loans. Offset/tax offset Federal payments, refunds or rebates to a borrower that are withheld to repay part or all of the borrower’s defaulted student loan debt. If the offset creates a severe hardship, a refund may be requested. Origination fee A fee paid to cover the cost of administering a loan. The fee is deducted from the borrower’s disbursed loan amount and then paid to the federal government. Origination fees vary among loan programs. PFH A term used to describe the status of a borrower whose monthly student loan payments (calculated under a 10-year repayment plan) are high relative to his or her income and family size. PFH is used in the calculation of the Income-Based Repayment Plan. Payment schedule Also known as the repayment schedule. This defines the payment start date, payment amounts and duration of the repayment period for a loan. For federal student loans, there are many flexible repayment plans in addition to the standard 10-year repayment plan of equal monthly installments. Peace corps A federally sponsored volunteer program that trains and sends volunteers to developing countries to work in various areas of need, including education, agriculture and health. Volunteers may be eligible for student loan deferments and partial loan forgiveness on qualified student loans. Pell grant A need-based federal grant that is not required to be repaid. Depending on financial need and other factors, grants of up to $5,350 may be made for the 2009–2010 academic year. The maximum amount may change from year to year. The school determines eligibility for a Pell grant based on information provided on the Free Application for Federal Student Aid (FAFSA). Perkins loan A federal loan that is awarded based on financial need and other factors. A maximum of up to $5,500 for an undergraduate student and $8,000 for a graduate student may be awarded. The interest rate is fixed at 5% and there are no fees. Because this is a federally subsidized loan, no interest accrues until repayment begins. The repayment period is 10 years, and the loan is repaid directly to the school. PLUS loan A non–need-based federal loan that allows parents to borrow funds to pay for the postsecondary education of their dependent student(s). Grad PLUS loans are also available to graduate and professional students. The interest is not subsidized by the federal government, and to be eligible, borrowers must pass a credit check to prove they do not have an adverse credit history. Principal The loan amount to be repaid. Interest on the loan is calculated as a percentage of the principal. When interest is capitalized, the calculated interest amount is added to the principal and interest accrues on the new higher loan balance. This leads to higher costs over the life of the loan. Typically, loan payments are applied first to accrued interest and then to the principal balance. Private loan Funds issued to borrowers by lenders outside of any federal or state loan program. Terms vary widely on private student loans and generally are not as favorable as with federal student loans. The terms and any lender information are provided on the promissory note the borrower signed to obtain the loan. Students and parents should exhaust all available federal funding and state funding before turning to private student loans. Promissory note A legally binding contract that defines the loan agreement between a lender and a borrower. To obtain a loan, a borrower must sign the promissory note, which legally obligates the borrower to repay the loan. The promissory note discloses loan terms, such as interest rates, conditions and repayment schedules, and provides information on a borrower’s rights and responsibilities. PSLFP A program established to encourage individuals to enter and continue working full-time in public service jobs, including some teaching positions. Borrowers qualify for loan forgiveness on the remaining balance of eligible federal student loans after making 10 years of qualifying payments and meeting the established service criteria. Rehabilitate Refers to a program that offers borrowers an opportunity to bring their loans out of a default status and repair the negative credit information reported to credit bureaus. Payment amounts are set at a reasonable rate and borrowers must make nine consecutive on-time payments over a 10-month period. Rehabilitation agreement A contract that sets forth new terms between the borrower of a defaulted loan and the holder of the loan, to bring the loan out of default. The agreement includes payment amounts and monthly due dates. Repayment schedule A schedule that defines the terms by which a borrower repays a loan, including the start date for loan repayment, payment amounts, and the length of the repayment period. Repayment term This usually indicates the length of time the borrower will make payments on their loans. For nonconsolidated student loans under a standard repayment schedule, the repayment term is 10 years. Scholarship Money given by a college, foundation or other entity that does not have to be repaid. Servicer An institution that provides loan-processing services to lenders. These services can range from disbursing the loan to collecting payments during the repayment period. Not all lenders use a loan servicer, but many do. Servicers do not hold any title or interest in the student loan itself. Stafford loan A type of federal student loan available under the Direct Loan Program or disbursed under the Federal Family Education Loan Program prior to July 1, 2010, to students enrolled at least half-time. The two types of Stafford loans are subsidized (based on financial need) and unsubsidized (borrower pays all interest), both offering a 6-month grace period. Annual and aggregate limits vary depending on whether the borrower is an undergraduate or graduate student. Annual loan limits are also based on the student’s grade level. Borrowers must complete the Free Application for Federal Student Aid (FAFSA) in order to be considered for this loan. Standard A loan repayment plan based on fixed monthly payments over a period of up to 10 years. However, for variable interest rate loans, the monthly amount may be adjusted to reflect interest rate changes. The repayment period may be shorter than 10 years depending on the amount of the loan. There is a minimum payment requirement of $50 per month. Subsidized In the case of subsidized federal student loans, the government pays the interest on the loans while the borrower is in school, during authorized deferments, and the grace period prior to repayment. As such, subsidized Stafford loans are granted based on financial need. Tax offset Borrowers with defaulted loans may have their federal tax refunds withheld or offset by the U.S. Department of Education. A refund may be requested if the tax offset creates a severe hardship. Tax offset refund Borrowers can request a refund of a tax offset if it creates a severe hardship or if the offset was made in error (e.g., an open bankruptcy case, incorrect information, etc.). Tax income Most income is considered taxable, or subject to federal and state tax laws, but certain types of income are not taxable or only partially taxable. Some examples of non-taxable income include welfare benefits, child support payments, workers compensation benefits and cash rebates. Some income is deemed taxable or non-taxable depending on the situation, such as life insurance proceeds received as the result of the policyholder’s death. Teach-out An agreement established between institutions (schools) of higher education to provide fair treatment to students whose academic program at their current institution is discontinued before all the students enrolled in that program have had a chance to complete it. Title IV financial aid Student financial assistance programs administered by the U.S. Department of Education, as specified by the Higher Education Act of 1965, Title IV. The programs provide for postsecondary education scholarships, grants and loans, including those issued under the Federal Family Education Loan (FFEL) and Federal Direct Loan Programs. Underserved A term used in higher education to describe typically low-income populations that are not served to the same degree as others because of geographic, economic, lingual, social or cultural barriers. "Underserved" usually describes institutions and community groups that are eligible for assistance under the Higher Education Act of 1965, Title I. Undue hardship A condition that is used in bankruptcy to discharge student loans. Under bankruptcy law, student loans are generally not considered a dischargeable debt. Under the bankruptcy code, a debtor may initiate a separate adversary proceeding and ask the court to find undue hardship. The debtor bears the burden of showing undue hardship, which is a very difficult, heavy burden to prove. Only debtors who have a serious disability or other condition that prevents them from working or maintaining a minimal lifestyle, despite a good faith effort to repay their debt, may qualify for an undue hardship discharge. Unsubsidized Federal student loans (PLUS and unsubsidized Stafford) for which the government does not subsidize, or pay, the interest at any point in the life of the loan. ED A federal agency that administers most federal programs concerning education, including the Federal Family Education Loan (FFEL) and Direct Loan Programs. U.S. Treasury A federal agency that is responsible for ensuring the financial security of the United States. The role of the Treasury includes supervising banks and implementing economic sanctions to ensure national security. Treasury branches include the Internal Revenue Service, U.S. Mint and the Bureau of Public Debt. Voluntary payment A loan payment made in addition to regularly scheduled payments. Making a voluntary or extra payment on a loan balance will reduce the total amount ultimately repaid, because it reduces the principal balance on which interest accrues. Borrowers must request that extra payments are applied as a payment against the principal balance, or payments will likely be applied to accrued interest if a balance exists. VISTA A volunteer program that operates under AmeriCorps and serves low-income communities on a nationwide basis. VISTA volunteers can earn an education award of up to $4,725 for a year of full-time service and use it to repay eligible student loans. Wage garnishment Also known as administrative wage garnishment (AWG), holders of defaulted loans in this situation can, without your consent, require employers to withhold up to 15% of the wages from your paycheck. The withholdings are applied to the balance owed until your student loans are paid or removed from default.