Glossary of Financial Aid Terms
Accrued interest: The interest that a loan accumulates over time.
APR: The Annual Percentage Rate, or APR, is the interest rate that results from including the nominal (advertised) interest rate and other factors that affect the cost of borrowing, such as the repayment schedule, repayment options, fees, etc.
Borrower: The person who is legally responsible for paying back the loan.
Capitalization of interest: The process of adding unpaid interest (often at the end of the loan’s grace period) to the principal of the loan. The amount owed increases, and this larger figure, the original principal and unpaid interest, accrues interest itself. It is advisable, if possible, to make interest payments while in school so that capitalization does not occur. Capitalization can also occur at the end of a deferment or forbearance, upon changing repayment plans, upon failing to recertify an income-based repayment plan, upon loan consolidation, or when a loan enters default status.
Co-borrower/Co-signer: The person who is obligated to repay the debt if the primary borrower fails to meet the terms of repayment on the loan. Repayment activity is reported on both the borrower’s and co-borrower’s credit histories.
Consolidation Loan: Combining several loans into one bigger loan from a single lender with the intention to simplify repayment and possibly get a lower interest rate or to reclassify a loan into a type that is eligible for Public Service Loan Forgiveness.
Default: Failure to repay a loan according to the terms agreed to in the promissory note. Default varies by loan type. When in default, the school, lender, and government may all take action to obtain the money owed. In addition, default can affect credit ratings for up to seven years. Default can be avoided by applying for deferment or forbearance before missing a payment.
Deferment (Economic Hardship): A type of postponement of loan repayment granted to borrowers when loan repayment is not possible due to extreme financial hardship. Eligibility for economic hardship deferment is more restricted than forbearance and generally requires that the borrower be receiving some sort of government assistance. If you do not qualify for a deferment, you may still be given forbearance. Subsidized loans in deferment do not accrue interest, but unsubsidized loans do.
Deferment (In School): A type of postponement of loan repayment granted to students who are in school and enrolled at least half-time. If you do not qualify for a deferment, you may still be able to get forbearance. Subsidized loans in deferment do not accrue interest, but unsubsidized loans in deferment do.
Delinquency: Failure to make loan payments by due dates, as specified in the promissory note and in the repayment plan. Delinquency can lead to default as well as negatively affect credit history.
Fixed Interest Rate: An interest rate that is set for the entire life of the loan.
Forbearance: A type of postponement of loan repayment. The borrower does not need to pay the principal during the forbearance period, but interest continues to accrue and must be paid, even on subsidized loans. Forbearances are usually granted by the lender in cases of financial hardship or other unusual circumstances when the borrower does not qualify for deferment.
Graduate PLUS Loan: The federally sponsored student loan for graduate-level students. Loan funds are disbursed directly to the school in equal amounts over each term of enrollment for the academic year.
Income-Based Repayment (IBR): A loan repayment plan for which the size of monthly payments is determined by the borrower’s income. IBR is available only for Stafford, Grad PLUS, and consolidation loans. Monthly payments are capped at 15% of discretionary income, where discretionary income is defined as the amount of income which exceeds 150% of the poverty line. Loan balances are forgiven after 25 years of eligible repayment. IBR is approved for a 12-month period, and you must recertify your IBR plan annually.
Interest: A fee that is charged periodically in exchange for the use of a lender’s money. It is paid in addition to repaying the amount borrowed. Interest is usually calculated as a percentage of the outstanding principal balance of the loan. Interest rate may be fixed for the life of the loan, or it may be variable, depending on the terms of the loan.
Loan Summary Letter: A statement from your loan servicer that lists your total loan balance along with your monthly payment amount and due date.
Loan: A type of financial aid that must be repaid, with interest.
Low Bono: The Union Coverage and “Low Bono” Program is designed to provide LRAP support for graduates either working for a union or a plaintiffs’-side firm that predominantly provides services to underrepresented members of society in the following practice areas, for instance:
- Civil and human rights law
- Criminal law
- Employment law
- Housing law
- Immigration law
In addition, LRAP guidelines mandate that at least 50% of the work of the firm and the applicant involves providing legal services on a pro-bono, reduced-fee, or court-awarded fee basis to underrepresented persons or organizations.
The program is only available to graduates of the classes of 2010 and beyond.
LRAP Contract: The LRAP agreement stating the terms and length of your LRAP award. Typically, LRAP contracts last 12 months. However, we occasionally offer contracts that are less than a year.
Negative Amortization: The accrued interest that is not paid by your monthly loan payment. Typically this occurs when you are enrolled in IBR or PAYE repayment plans.
Pay As You Earn (PAYE): A loan repayment plan for which the size of monthly payments is determined by the borrower’s income. To be eligible for PAYE, you must be a new borrower as of Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. PAYE is available only for Stafford, Grad PLUS, and consolidation loans. Monthly payments are capped at 10% of discretionary income, where discretionary income is defined as the amount of income which exceeds 150% of the poverty line. Loan balances are forgiven after 20 years of eligible repayment. PAYE is approved for a 12-month period, and you must recertify your PAYE plan annually.
Perkins Loan: Federal loan with a 5% interest rate during repayment. Students must demonstrate financial need. Perkins loans are not eligible for IBR or PSLF unless consolidated with Direct Loans. Acs-education.com is the Perkins loan servicer for UC Berkeley.
Principal: The principal or loan balance is the amount of money borrowed or remaining unpaid on a loan. Interest is charged as a percentage of the principal. It represents an agreement by the borrower to repay the debt according to the specified terms and conditions.
Private loans: Education loans from private lenders to supplement the student and parent education loans offered by the federal government.
Promissory Note: A binding legal document that must be signed by the borrower before the loan funds are disbursed by the lender.
Public Service Loan Forgiveness Program (PSLF): Under PSLF, full-time* public service employees may qualify for forgiveness of the balance of their loan after 120 on-time monthly payments (10 years). PSLF only applies to federal loans made through the Direct loan program (Subsidized and Unsubsidized Stafford Loans, PLUS Loans, and Consolidation Loans).
*If you have 2 or more part-time jobs, you must be employed for at least 30 hours total per week to meet the criteria.
Subsidized Direct Stafford Loan: Federal student loan for which the government pays the interest on the loan while the student is in school and during the 6-month grace period. This loan is awarded to students based on financial need. As of July 2012, the subsidized loan is no longer available to graduate level (including law) students.
Unsubsidized Direct Stafford Loan: Federal student loan for which the government does not pay the interest. The borrower is responsible for the interest on an unsubsidized loan from the date the loan is disbursed, even while the student is still in school. Students may avoid paying the interest while they are in school by capitalizing the interest after the 6-month grace period, which increases the loan amount. Unsubsidized loans are not based on financial need and may be used to finance the family contribution.
Variable Interest Rate: Interest rate that fluctuates with marketing conditions and resets periodically, such as monthly, quarterly, or annually.