Glossary of Terms

Subsidized Loan  Loan on which the federal government pays the interest while the student is in school. Because there is a subsidy, eligibility for these loans is usually based on financial need. Examples of subsidized loans are Federal Perkins Loans and Federal Direct Subsidized Loans. (Perkins, Stafford are fixed; Alternative usually variable)

Unsubsidized Loan  Loan not based on financial need in which there is no monetary assistance granted to the borrower to assist with the interest expense. The borrower may either pay the accruing interest monthly or allow the interest to be added to the principal. An example of an unsubsidized loan is the Federal Direct Unsubsidized Loan and most alternative loans.

Interest  A charge for a loan, usually a percentage of the amount loaned.

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

Capitalized Interest  The interest that accrues on a loan which, if not paid prior to a specific date, is added to the principal balance. Capitalizing interest increases the amount a borrower owes, especially if capitalization occurs frequently. Compounding is another term used for capitalization.

Interest Rate  The rate at which interest is charged. i. A fixed interest rate is a constant rate of the amount borrowed ii. A variable rate is subject to change, anywhere from monthly to annually. It is normally tied to an index such as the U.S. prime rate, which is the interest rate banks charge to large corporations for short-term loans, or to U.S. treasury bills.

Principal  The amount of money that is borrowed before any interest is applied. It is the amount of money you receive (as in a student loan) or the cost of the item you purchased (financing a large purchase like a car, or something you bought using a credit card). Loan only terms

Guarantor (Guaranty Agency)  State or private nonprofit organization that agrees to reimburse the holder of a loan if the borrower does not honor his or her repayment obligation. In Texas, the primary guarantor agency is TG.

Grace Period  Payment-free period that follows the student’s graduation, withdrawal, or in some instances dropping below half-time enrollment status. Grace periods vary by loan  program, but typically are six to nine months. If the loan is subsidized, ordinarily no interest
accrues during the grace period. But if the loan is unsubsidized, interest continues to accrue.

Origination Fee  Fee charged by a lender and deducted from the proceeds of a loan before disbursement. This fee partially offsets the administrative costs of the loan.

Promissory Note  Legal document a borrower signs each time they receive a loan. The promissory note includes the conditions under which the money is borrowed, including interest rates and deferment and cancellation options.

Consolidation  The process of combining eligible education loans into a single new loan with a fixed interest rate. Ordinarily used to refer to a federal consolidation loan program which allows borrowers to lower their monthly repayments by combining two or more eligible federal loans. This is done after graduation, and can be done once for every degree.

Deferment  Temporary suspension of a borrower’s monthly loan payment. There are several specific conditions that can qualify a borrower for deferment, including financial hardship, enrolling in a degree program at least half-time, or serving in the military or Peace Corps. (Your student loans are deferred while you’re in school).

Forbearance  Temporary suspension or reduction in monthly loan payments granted to borrowers who are willing but unable to make loan payments due to certain types of financial hardships.

Finance Charge/Fees  The charge for using a credit card, comprised of interest costs and other fees. Read the fine print. You may have different fees for cash advances, balance transfers, unpaid monthly balances, late payments, or going over your credit limit – all very
avoidable. You may also discover that if you pay off your balance on time each month and don’t go over your credit limit, you will escape finance charges.



Institute for Financial Literacy: Glossary of Personal Finance Terms
Bankrate: Financial Literacy Glossary