Make Financial Aid Work for You: 40 Student Loan Terms To Know
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By Karin Hansen | Apr 19, 2012
Whatever your reason for attending college, doing so should be an investment. That's why people go after it at all, why they find the energy to make it to class after a day or work or stay up half the night finishing a paper: because they hope to get something out of the experience that can benefit them in the future.
If you're not sufficiently informed about the types of available financial aid, however, your education could cost significantly more than is necessary, or even plummet you into debt. The world of financial aid may seem murky and interminable to the uninitiated, but by taking the time to educate yourself on the many grants, loans, and customs that make up the system of student financial aid, you can avoid costly mistakes and maximize your educational investment. Here's a look at 40 student-loan terms that could help you wade through all the lingo.
General Knowledge and Financial Aid Terminology
- Student Loan: In the U.S., student loans belong to one of three categories: unsubsidized federal loans (which accrue interest while a student is in school), subsidized federal loans (which allow students to defer interest accrual until after they've left school), and private student loans. Student loans typically feature interest rates that are at least two percentage points lower than the going market rate for conventional loans, and repayment usually begins 6-12 months after a student leaves school, regardless of completion.
- Grants: Grants are awarded to post-secondary students in order to fund their continuing education. Many are government-issued, though some originate from other entities. Grants, unlike loans, do not have to be repaid.
- Private Student Loan: Private student loans are financed by private lenders rather than federal or state governments. Interest rates vary considerably among lenders, the biggest of whom are Sally Mae and Nelnet. Following legislation in 2005, private lenders are guaranteed a return on their investment unless a student demonstrates "undue hardship."
- FAFSA: FAFSA stands for the Free Application for Federal Student Aid. It is a form that may be submitted annually by current and prospective college students in order to determine their eligibility for any of the nine federal student-aid programs or 605 state aid programs. Institutional aid is dispensed on a first-come, first-serve basis, and students are therefore advised to submit a FAFSA as early as possible (new applications are accepted on January 1st).
- Underwriting: This term describes the process any large financial service provider might undertake to assess the eligibility of a prospective customer to receive said institution's products (in the case of this article, student loans). Banks and other lenders typically take into account such factors as credit history, employment status, and personal income.
- Financial Institution: Any institution that provides financial services to customers. The three main types of financial institutions are deposit-taking and loan-making institutions, such as banks; insurance companies and pension funds; and brokers, underwriters and investment funds.
- Credit Risk: The risk of loss undertaken by lenders and investors that borrowers may fail to make planned payments. Investor losses include both the principal loss as well as lost interest.
- Default: In financial terms, a default occurs when the debtor (i.e. a student who takes out a loan) fails to meet the conditions of the loan agreement. This occurs when a debtor violates a loan covenant or simply does not repay the loan.
- Income-based Repayment: An Income Based Repayment option, or IRB, is a type of student loan repayment plan that takes into account a student's income and family size. In order to qualify for IRB, one must demonstrate financial hardship. One downside to the IRB is that because debt is paid off more slowly, the student ultimately pays more interest.
- Student Debt: Student debt is incurred when a student owes money to a lending institution. Debt of this kind is routinely seen prior to the repayment of student loans, but can also accrue when a student withdraws from a school and encounters retroactive financial penalties.
- Student Loan Guarantor: A student loan guarantor is one who agrees to pay off a student's debt should he or she default on a loan. Guarantors are often used when a student applicant has bad credit or no credit history.
- Qualification: Qualification refers to the basic eligibility requirements placed on student loans. A qualified student loan must be for you, your spouse, or a dependent; paid within a reasonable amount of time; and go toward the education of an eligible student.
- Government-Sponsored Enterprise: A GSE is a financial services corporation that enhances the flow of credit in order to target sectors of the economy and to increase the efficiency and transparency of those sectors. The goal of GSEs is to expand the availability, and reduce the cost of, credit to students and other borrowers.
- College Tuition: Tuition is the fee charged for instruction in institutions of higher learning. Tuition is markedly cheaper for students attending college in their home state; however, ample financial aid exists for both in-state and out-of-state students.
- Financial Aid: Financial aid covers all funding for a student's educational expenses. These expenses include tuition, books and room and board.
- Higher Education Opportunity Act: In 2008, the Higher Education Opportunity Act amended the Higher Education Act of 1965 by enacting significant changes in student loan discharges for disabled people. Under the new provisions, disabled students may qualify for student loan discharges even if they have an income.
- U.S. Department of Education: The Department of Education is a cabinet-level department of the U.S. government. Its primary functions include the administration and regulation of federal assistance, the collection of data on American schools, and the enforcement of privacy and civil rights within the educational sphere. It has little involvement in the development of curriculae and educational standards.
- Federal Student Loan Consolidation: In the U.S., consolidation loans allow students to consolidate Stafford Loans, Perkins Loans, and PLUS Loans into a single debt. These consolidated loans come with a fixed interest rate and reduced monthly payments.
- Cost of Attendance: Cost of Attendance, or COA, refers to the estimated total cost of completing one year as a full-time student. The COA accounts for tuition and fees, books and supplies, room and board, transportation and reasonable personal costs. Each institution of higher learning publishes their unique COA.
- Co-signing: Co-signing describes the act of promising to pay off another's debt should that person fail to do so. Co-signers are the guarantors of contracts.
- Federal Student Loan Forgiveness: Several government-backed loans are eligible for loan forgiveness and cancellation programs. Certain full-time teachers, social workers, Peace Corps volunteers and law/medical/veterinary school students may have a portion of their student loans cancelled each year.
- Origination Fee: Origination fees, also knows as activation fees, are paid to banks and other lenders at the establishment of a customer's account. These payments range from .5% to 2% of a given loan amount.
- Federal Student Loans: All student loans that are fully guaranteed by the U.S. government. Contrast these with state loans and private student loans.
- Higher Education Act of 1965: Signed into law by President Lyndon Johnson, the Higher Education Act of 1965 increased federal assistance to universities, created scholarships, and provided students with low-interest loans. It is reauthorized periodically, with new provisions surfacing every few years.
- Need-based Aid: Need-based loans are a form of financial aid awarded to students who meet specific income criteria, thereby demonstrating need for financial assistance. Completion of a FAFSA form is essential to receiving government-issued, need-based loans.
- Merit-based Aid: Merit-based scholarships and grants are awarded to students to demonstrate excellence in academics, athletics and leadership, as well as other special talents. They may be given to a student by her university or by outside organizations.
- National Student Loan Data System: The NSLDS refers to the arm of the U.S. Department of Education that is tasked with collecting loan data from schools, guaranty agencies and the Direct Loan Program. It serves as the government's central database for federal student aid.
- American Student Assistance: The ASA is a non-profit entity committed to helping students and their families manage the debt incurred through higher education. It emphasizes delinquency and default prevention, keeping students out of trouble and saving taxpayers millions of dollars.
- Collection Agency: When an individual fails to repay a lender or otherwise meet the terms of his or her loan, the debt is usually turned over to a collection agency. These agencies are fully-functioning businesses that pursue debt payments.
- College Cost Reduction and Actions Act: A relative newcomer on the student financial aid scene, this piece of legislation increased the maximum Pell Grant award and enacted loan cancellation for public servants.
- Incentives: Financially speaking, this refers to the practice of lenders offering either tougher or more attractive terms to loan applicants, which are based on a student's payment record.
Specific Loans and Grants
- Stafford Loan: Stafford loans are a form of government-sponsored student financial aid that offer low, fixed-interest rates and in-school deferment, meaning a student does not accrue interest until six months after he graduates, withdraws, or drops below half-time enrollment. These loans are regulated by strict eligibility requirements and borrowing limits.
- Federal Direct Student Loan Program: Otherwise known as the FDSLP, this type of loan offers low-interest financial assistance to post-secondary students. It is funded by the U.S. Department of Education, and is therefore subject to budget changes and different political agendas.
- Perkins Loan: The Perkins Loan is a need-based student loan that carries a 5 percent fixed interest rate for the duration of the 10-year repayment period. It is federally subsidized and comes with a nine-month grace period and is eligible for federal loan cancellation in the case of certain full-time teachers and Peace Corps volunteers.
- PLUS Loan: Another student loan backed by the U.S. Government, the PLUS features a 7.9 percent fixed interest rate that is charged from the loan's first disbursement until the loan is paid in full. Eligibility for the PLUS loan is based on the credit history of the student's parents or of the graduate students themselves.
- Pell Grant: Federal Pell Grants are provided to undergraduate students who demonstrate financial need. The amount awarded to any given student through a Pell Grant has a rather modest maximum, and changes annually. Unlike loans, these grants do not have to be repaid.
- Federal Work-Study Program: FWS or Work-Study is a federally-funded program that assists students with the costs of higher education. Work-Study provides part-time work to students in order to help fund their education, and is open to all students (undergraduate and graduate alike) who demonstrate need.
- Federal Supplemental Educational Opportunity Grant: More commonly known as simply the SEOG, this grant provides federal assistance to those students with the greatest financial need. It is only available to American undergraduates who are not in default for any federal student loan and don't have Pell Grant overpayments.
- Segal AmeriCorps Education Award: Individuals who have completed a term of service in the AmeriCorps are eligible to receive this educational award. It may be put towards future educational costs or outstanding student loans, and is good for seven years following termination of service.
- SLS Loans: SLS Loans, or supplemental loans for students, are designed to help students who need more financial assistance than federal loans can provide. Many are not based on need, but rather on an applicant's creditworthiness.