Loan Term Definitions

Auto-debit. Repayment of a loan by auto-debit occurs when the borrower sets up an agreement with the loan servicer to deduct monthly loan payments directly from the borrower’s bank account. Lenders may offer a slight interest rate deduction for this type of payment.


Capitalization. A term used to describe a method of computing interest. To capitalize a loan means to add all interest that has accrued to the principal loan amount. Once a loan is capitalized, the new loan amount (both principal and interest) is the amount upon which interest will accrue.


Co-signer/Co-borrower. An additional applicant added to a loan to meet creditworthiness guidelines, often a parent. A co-signer/co-borrower has the same legal responsibility on the loan as the primary borrower.


Credit-Based. Credit-based lending considers past credit history and income to determine eligibility for a loan. Repayment history, delinquencies, and length of time the accounts have been established are considerations in determining a borrower's ability to obtain a loan. The credit history of both the student (if he or she has a credit history) and the co-applicant will be reviewed. Federal Direct GradPLUS and private loans are credit based.


Credit Score. Your credit score is a number based on the information in your credit file that shows how likely you may be to pay a loan back on time — the higher your score, the less risk you represent.


Deferment. A time during which the borrower is not required to make payment. During deferment, interest will accrue on the loan, although the borrower is not obligated to make payment on the loan amount.


Enrollment Status. Your educational institution's own classification of your attendance, important to your eligibility for student loans. Federal Direct Stafford, Federal Direct GradPlus, and private loans require that you be enrolled at least half-time.


Fixed Interest Rate. An interest rate which remains the same throughout the life of the loan, through repayment.


Grace Period. The length of time a borrower is granted before the first payment is due. Grace period may refer to the time between disbursement of funds and the first payment if immediate repayment is required, or the length of time from the end of a deferment period to the first payment.

Guarantee Fee. A fee charged for federally backed student loans. Also normally deducted from the gross loan proceeds and paid on your behalf by your lender to the guarantor.


Interest. Money paid for money borrowed. Most interest is computed using a percentage of the outstanding balance of the loan.

LIBOR. LIBOR means the London Interbank Offered Rate. LIBOR represents an average of the interest rates on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. LIBOR is among the most common of benchmark interest rate indices used to make adjustments to variable rate loans.


Origination Fee. The fee, charged by the lender, for services provided in connection with the origination and funding of the loan.


Prime Rate. The Prime Rate is defined by The Wall Street Journal as "The base rate on corporate loans posted by at least 75% of the nation's 30 largest banks." A good website to check loan rates is


Subsidized (Federal Direct Stafford Loan). The subsidized portion of a Federal Direct Stafford Loan (up to $8,500 annually) has its interest paid by the federal government during the in-school (at least half-time enrollment) period, and for six months after graduation or a drop to less than half-time enrollment. The FAFSA (Free Application for Student Aid) is used to determine how much subsidized Stafford Loan a student may borrow.


Unsubsidized (Federal Direct Stafford Loan). Up to $20,500 (the annual maximum) of a Federal Direct Stafford Loan may be unsubsidized, depending upon how much of a subsidy a borrower receives. If a student qualifies for the full $8,500 subsidy, then the maximum unsubsidized Stafford Loan a student may borrow is $12,000 per year. Interest begins to accrue on unsubsidized Stafford Loan upon disbursement.


Variable Interest. An interest rate that may change depending on the terms of the loan.

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