Glossary of Financial Terms
The following is a list of consumer finance terms and
definitions. Not all of them relate to student loans. However, a
familiarity may be helpful in future financial transactions.
- Accrued Interest
- Interest which accrues on the loan and
is payable by the borrower or federal government. Interest is
calculated on the unpaid principal balance and becomes “accrued
interest.”
- Amortization
- The gradual reduction of a loan debt by periodic installment (usually monthly) payments of principal and interest.
- Balloon Payment
- The last payment of a loan that is much
larger than the preceding payments. If there is to be a balloon
payment, it should be clearly stated in the loan contract.
- Bankruptcy
- A legal action in which a person who is
unable to meet financial obligations is declared bankrupt by a decree of
the court; under the Federal Bankruptcy law this person’s property
becomes liable to administration to satisfy creditors. The filing of
bankruptcy will not, in most cases, discharge your educational debt.
- Capitalized Interest
- Unpaid interest amounts that are added to the principal amount borrowed; the total becomes the new principal balance.
- Collateral
- Something of value pledged as a security
for a loan. Banks do not require collateral on all loans. No Federal
educational loans require collateral; some require endorsement/co-signer
- Collection Agency
- A company that attempts to collect delinquent or defaulted loans. Compounded Interest
- The frequency with which interest is computed and added to the principal to arrive at a new balance.
- Consolidation
- Combining one’s loans by the process of
selling and transferring all loans to one holder. This usually extends
repayment over a longer period of time and lowers the total monthly
payment.
- Cosigner
- A second credit-worthy party who is required
to sign a promissory note for a loan with a borrower who has no
collateral or credit history; this party, by signing, guarantees that
the loan will be repaid if the borrower defaults.
- Credit Bureau
- An agency that compiles and distributes
credit and personal information to creditors. Such information may
include payment habits, number of credit accounts, balance of accounts
and length and place of employment. You have the right to examine your
credit file, and to explain or correct information.
- Default
- The failure of a borrower to make an
installment payment when due, or to meet other terms of the promissory
note, and it is reasonable to conclude that the borrower no longer
intends to honor the obligation to repay.
- Deferment
- An approved postponement of payment for a specified period.
- Delinquent
- The borrower fails to make an installment payment when due, or to meet other terms of the promissory note.
- Disbursement date
- The date the loan check is issued by the lender.
- Disclosure Statement
- Statement of the actual cost to
the borrower of a loan, that is, the interest rate and any additional
finance charges. This must be presented to the borrower by the lender.
It lists details of the repayment agreement, where, when, and what size
installments will be owed, interest terms, types of credit insurance,
and other items relevant to the loan.
- Economic Hardship
- A borrower situation involving financial difficulty, under which the borrower may be granted a deferment or forbearance.
- Fixed Interest
- Rate of interest that does not change
during the life of the loan, is determined at the time that the loan is
negotiated, and is given in the disclosure statement and the promissory
note.
- Forbearance
- A temporary postponement or reduction of
payments, approved in advance by the lender, for a borrower who
experiences financial hardship. Usually interest accrues and is the
borrower’s responsibility to pay during the period of forbearance.
- Garnishment
- The withholding of a specified amount from a delinquent or defaulted borrower’s wages or salary to pay a creditor.
- Grace Period
- A period of time, normally a 6, 9 or 12-month period, before the borrower enters repayment.
- Guarantee Agency
- A state or private non-profit agency that administers a student loan insurance program.
- Guarantee Fee
- An administrative fee charged by the guarantor for each loan it guarantees.
Holder - The entity which holds a legally effective promissory note and which has the right to collect from the borrower.
- Installment Note
- A loan that is to be repaid in equal installments (usually due monthly or quarterly) over a set period of time.
- Interest
- The price paid or fee charged for the use of
borrowed money, computed as a percentage of the principal borrowed for a
given period of time.
- Maturity Date
- The date upon which a promissory note becomes due and payable.
- Negative Amortization Schedule (Payments)
- The monthly payment is insufficient to repay the scheduled amortized loan amount.
- Net Income
- Earnings from wages after required
withholding of federal and state income taxes and social security
benefits, and other voluntary withholdings.
- Origination Fee
- A fee charged to the borrower on a
guaranteed student loan to offset the cost of administering the program.
It is also charged on some private loans. It is deducted from the loan
proceeds.
- Principal
- The face value of the loan; the amount upon which interest is charged.
- Promissory Note
- A written promise to pay a sum of money to a specified person or holder for a certain time period.
- Secondary Market
- A state or private agency that purchases loans from lenders.
- Servicer
- The entity designated to track and collect a loan on behalf of the holder.
- Simple Interest
- Interest calculated on the original principal only.
- Subsidized Loan
- Interest costs during school years and
qualifying deferment periods are paid (subsidized) by federal funds. No
interest is charged to the student during qualifying deferments.
- Treasury Bill/ T-Bill
- Short-term U.S. Government debt
obligations backed by the full faith of the U.S. Government. T-Bills
have a maturity of one year or less, auctioned weekly by the U.S.
Treasury. The rate is established at the weekly auction.
- Unsubsidized Loan
- Interest accrues from othe date of disbursement; borrower is responsible for repayment of all interest costs to lender.
- Variable Interest
- Rates of interest that are tied to a certain index (depending on the loan) and change periodically as the index changes.