Glossary of Financial Aid Terms

Achievement Tests: Tests required by some colleges to measure student achievement in specific areas of study such as English, Math or Science.

Accrued Interest: Interest that accumulates on the unpaid principal balance of a loan.

ACT: A test published by American College Testing to measure a student's ability in math, verbal comprehension and problem solving. Usually students take this test during their junior or senior year of high school.

Adjusted Gross Income: Income listed on your family’s income tax return

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. This can occur in FFELP loans if regular payments are not made in a timely manner.

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.

Borrower: Any "legal entity" who obtains funds from a lender by the extension of credit for a period of time; said borrower signs a "promissory note" as evidence of the indebtedness.

Cancellation: The balance of a student loan may be cancelled upon the death or total and permanent disability of the borrower.

Capitalization of Interest: Addition of unpaid interest to the principal balance of a loan which increases total outstanding principal.

Compounded Interest: The frequency with which interest is computed and added to the principal to arrive at a new balance.

Consolidation: Consolidating multiple education loans into one new loan with a new repayment term and interest rate.

Cosigner: A signer of a promissory note who is secondarily liable for a loan obligation. This term is no longer used in federal regulations. See also Endorser.

Cost of Attendance (also known as Cost of Education): An estimate of the student's educational expenses for the loan period.

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.

Default: Failure to repay a loan. By law, default occurs at day 270 of delinquency for Stafford and PLUS loans.

Deferment: A period when a borrower, who meets certain criteria, may suspend loan 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.

Delinquency: Failure to make monthly loan payments when due.

Disbursement: The date the loan check is issued by the lender.

Disclosure Statement: Statement of the total cost and amount of a loan, including the interest rate and any additional finance charges.

Expected Family Contribution: Amount a family is expected to contribute to a student's education. EFC is calculated based on family earnings, net assets, savings, size of family and number of students in college.

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.

Endorser: A signer of a promissory note who is secondarily liable for a loan obligation, i.e., who agrees to pay if the borrower does not. A lender may require a PLUS borrower with adverse credit to obtain a creditworthy endorser in order to receive the loan.

FFELP: The Federal Family Education Loan Program.

Fixed Interest: Rate of interest which 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: Temporary adjustment to repayment schedule for cases of financial hardship.

Grace Period: Specified period of time after a student graduates or leaves school during which loan payments are not required.

Graduated Payments: A form of payment schedule under which the amount of the borrower's installment payment is scheduled to change (usually by increasing in two or more increments) during the course of the repayment period.

Grants: Funds awarded by a college or institution to students with financial need. They do not have to be repaid.

Guarantor or Guarantee Agency: State agency or private non-profit institution that insures student loans for lenders and helps administer the FFELP. 

Holder: The institution that owns a loan.

Income Sensitive Payments: A form of payment schedule under which the borrower's monthly payment amount is adjusted annually, based solely on the borrower's expected total monthly gross income received from employment and other sources during the course of the repayment period.

Insurance Fee: A fee charged for guaranteed student loans that is actually default insurance and is deducted from the loan amount.

In-School and Grace Interest Subsidy: Interest the federal government pays for borrowers on certain loans while the borrower is in school, during authorized deferment or grace periods.

Interest-Only Payment: A payment that covers only accrued interest owed on a loan and none of the principal balance.

Interest: The amount a borrower pays to borrow money.

Lender: A financial institution, agency or school that provides the money to make a loan to a borrower.

Maker: The borrower.

Maturity Date: The date upon which a promissory note becomes due and payable.

Merit-based: A means of determining eligibility for certain types of financial aid using merit, such as specificaccomplishments or talents, as the determining factor, rather than financial need.

Need-based: A means of determining eligibility for certain types of financial aid using financial need as the determining factor.

Need Analysis: The computation of expected student and family contribution to the cost of an education and consequent "need" for financial assistance; it is based on an analysis of detailed financial information about the income and assets of students, spouse, and family.

Negative Amortization Schedule (Payments): The monthly payment is insufficient to repay the scheduled amortized loan amount.

Origination: The process whereby the originator, or a servicing agent on behalf of the originator, handles the initial application processing and disbursement of loan proceeds.

Origination Fee: Fee, payable by the borrower and deducted from the principal of a loan prior to disbursement to the borrower. For federally backed loans, the origination fee is paid to the federal government to offset the cost of the interest subsidy to borrowers. For private loan programs, the origination fee is generally paid to the originator to cover the cost of administering and insuring the program.

Per Diem: Daily.

Pro Forma: Projection of income and expenses, usually prepared annually, based on historical performance.

Principal: Amount borrowed, which may increase as a result of interest capitalization, and the amount on which interest is calculated.

Promissory Note: Contract between a borrower and a lender that includes all the terms and conditions under which the borrower promises to repay the loan.

The Preliminary Scholastic Assessment Test: National Merit Scholastic Qualifying Test, which helps prepare students for the SAT and is part of the qualifying criteria for the National Merit Scholarship Program. A student usually takes this test as a high school sophomore or early in the junior year.

SAT: The Scholastic Assessment Test, which is used to measure a student's ability in math, verbal comprehension and problem solving. SATs are administered during the junior and senior years in high school.

Scholarships: Funds used to pay for higher education that do not have to be repaid. Scholarships may be awarded based on any number of criteria, such as academics, achievements, hobbies, talents, affiliations with various groups, or career aspirations. They usually do not provide funds for living expenses.

Secondary Market: Institutions, like Sallie Mae, that buy student loans from the institutions that originate or own them.

Serialization: Combining several loans into one account so that the borrower only pays one monthly bill. Original loan terms do not change with serialization.

Servicer: Organizations, like FISC, that administer and collect loan payments. May be either the loan holder or an agent acting on behalf of the holder.

Simple Interest: Interest calculated on the original principal only.

Transcript: A list of all the courses that a student has taken at a particular high school or college with the grades that the student earned in each course. Transcripts are usually required for college applications.

Variable Interest: Rates of interest that are tied to a certain index (depending on the loan) and change periodically as the index changes.