Loan Agreement Terminology
Accruing Interest
When the interest on the loan is adding up even before repayment begins, the interest is accruing. When the loan goes into repayment, the amount owed includes the interest which has accrued as well as the principal originally borrowed. Some loans, such as the Subsidized Direct Loan, do not begin to accrue interest until the loan goes into repayment.
Cancellation
The balance of a student loan may be canceled upon the death or disability of the borrower or for practicing medicine in a particular geographic location or in a particular field.
Capitalizing Interest
Capitalizing is the process of adding the interest to the principal. Compounding is what happens to the original interest after it has been capitalized. The interest is capitalized when the lender adds the interest that has accrued during a stated interval to the principal. Henceforth, interest accruing is calculated on the sum of the principal plus past accrued interest. To prevent interest from capitalizing on these types of loans, it can be paid as it accrues.
Collection Costs
Many loan agreements specify that all or a portion of the costs of collection will be borne by the borrower. If a loan is in default, the entire amount of the principal balance and accrued interest may be referred to a collection agency. The fee for this service to the lender is usually one third of all monies collected. Thus, the borrower can become liable for up to an additional 33-1/3 percent of his remaining loan obligation.
Credit Bureau
An agency that compiles and distributes credit and personal information to creditors and may include your payment habits, number of credit accounts, balance of those accounts, place of employment, and length of employment.
Default
When the borrower fails to meet the financial obligations set forth in the loan repayment agreement. If the schedule of payments is not followed and a sufficient number of payments have been missed, the loan is considered to be in default. If a loan is declared in default, the entire unpaid balance and all accrued interest become due.
Deferment
Conditions under which a borrower may request postponement of repayment obligations. The circumstances under which a deferment may be obtained are listed on the loan agreement. Interest may or may not be assessed during this period. Deferments are not automatic; they must be applied for.
Delinquent
If a loan payment is not made on time or a deferment form is not filed on time, the borrower is considered delinquent and can be charged late fees. If a sufficient number of payments have been missed in sequence, the borrower will be in default (see above).
Disclosure Statement
Statement of the actual cost of a loan, which includes the interest rate and any additional finance charges.
Forbearance
Under certain circumstances, if a borrower is having trouble making payments during the repayment period, the lender can exercise forbearance, which will allow either a reduction in the amount of payment or require no payment for a limited period of time. Interest will continue to accrue during this period. Federal regulation states you can request yearly forbearance on Stafford and/or Direct Loans during a residency. Interest begins to accrue, no payments are required, and your credit rating will not be affected.
Grace Period
The period of time between graduation or termination of study and when the loan repayment obligation begins. The length of this interval is stipulated in the loan agreement and is applied automatically. Interest may or may not be assessed during this grace period.
Insurance Fee
A fee that covers default insurance for guaranteed student loans. It is deducted from the principal and paid to the agency that guarantees the loan.
Interest
The fee which is charged for the borrower's use of the money. Customarily, the percentage is indicated as an annual rate. If the rate is "fixed," it remains constant for the life of the loan. If the rate is "variable," the percentage will fluctuate periodically and is usually based on the rate of certain government securities.
There are two ways of calculating interest. Simple interest is charged on the principal balance of the loan. Compound interest is assessed on the original principal plus the amount of the unpaid interest.
Loan Consolidation
A program that refinances certain loans by buying them and issuing the borrower a new combined loan with different terms. The advantage to the borrower is that the debt can be restructured to create smaller payments over a longer period of time. Loan consolidation is good for monthly cash flow, but it does increase the total cost of borrowing.
Loan Forgiveness
Under certain circumstances, all or a portion of the loan obligation may be waived. The conditions under which this forgiveness will occur are set forth in the loan agreement.
Loan Maturity
The date when all principal and interest payments are to be completed.
Maker
The borrower or individual signing the loan agreement.
Origination Fee
The fee charged by the government to process a loan. It is deducted from the principal amount of the loan.
Principal
The dollar amount you have borrowed as listed on your loan contract. The amount of the disbursement you receive may be less than the amount of the loan and reflect the costs of fees that are deducted for processing the loan.
Promissory Note
The loan agreement or contract you sign which outlines the terms of repayment.
Repayment Schedule
Repayment of a loan may be accomplished over a stipulated period of time by dividing the total cost into a number of equal payments or by a series of graduated payments. On some occasions a final payment, called a balloon payment, which is substantially larger than the preceding payments, may be included in the schedule.
Some loan programs may provide a variety of repayment options. For those loan programs administered by the University, the student's choice of a repayment schedule is made in his or her exit interview (the time the borrower graduates).
Truth-in-Lending Statement
Required by law. Information concerning the total cost of the loan including all finance charges is presented to the borrower at the time the promissory note is signed.
