Loan Vocabulary
Capitalization: Accrued/deferred interest is added to the principle amount of the loan and additional interest will be based upon the higher amount (i.e., you pay interest on the interest). Most lenders capitalize only once immediately before repayment begins, but it is best to confirm this with your lender. You will reduce the amount of interest that you pay by paying the interest as it accrues each month before entering repayment. See the Repayment Chart (PDF) "Monthly Interest-Only Loan Payments" section for estimates.
Default: This is when you are 270 days behind on your loan payments. If you default, you will be reported to national credit bureaus, your wages can be garnished, your income tax refund can be withheld, and you won't be able to get student aid to return to school. To avoid default, make sure your lender always has your current address, and contact the lender if you're having trouble making payments. Your lender may be able to grant you forbearance or make other arrangements to keep you from defaulting.
Deferment: A period in which a borrower is allowed to postpone payments on the loan principle. The interest accrues and is capitalized, and the borrower is responsible for paying it.
Disbursement: An electronic or manual release of funds to the school for delivery to the borrower.
Entrance/Exit Counseling: Required counseling sessions that Stafford borrowers (students) must complete to receive loan funds. The intent is to provide students with loan information and ensure they understand their options and responsibilities. This is not a requirement for parent PLUS borrowers. Parents please do not complete this requirement for your students.
Forbearance: A special agreement between the lender and the borrower to delay or reduce monthly loan payments because of financial hardship.
Grace Period: A specified period of time between graduation, withdrawal or dropping below part-time status and when repayment begins for the borrower, typically 6 months in length.
Guarantor: A state or private not-for-profit organization that guarantees federal student loans.
Guarantee Fee: A fee that some guarantors charge to maintain reserve funds to reimburse lenders in the event a student/parent borrower fails to repay a loan. This fee is typically 1%.
Lender: An organization, financial institution, agency or school that provides money to a student on the condition that it will be repaid.
Master Promissory Note (MPN): A one-time loan application completed by the borrower(s) and kept by the lender for federal loans. The MPN is good for 10 years.
Origination Fee: A fee charged by the federal government on all federal loans. The current origination fee is 3% and is withheld by the lender from all loan proceeds.
Repayment: The period in which a borrower takes on the responsibility of repaying the loans that helped finance the cost of education.
Materials compliments of Oregon First.
