Terms You Need to Know
Many of you may need to borrow education loans to pay for your legal education. Beginning the borrowing process can often be complex and confusing. To work your way through it you will need to understand a variety of terms that may be unfamiliar to you. While this list is not all inclusive, it is our hope that after you have read through it, you will have a basic understanding of the terms associated with the loans you are about to borrow.
Amortization: The gradual elimination of a debt over a specified period of time through periodic payments.
Annual Percentage Rate (APR): A percentage calculation that reflects the total cost of a loan on an annual basis. It includes interest, plus all fees.
Capitalization: A process whereby a lender adds any unpaid interest to the principal of the loan, thereby increasing the outstanding balance on which interest accrues. How often a lender capitalizes the interest will affect the ultimate cost of the loan.
Compounded Interest: The frequency with which interest and fees are computed and added to the principal balance. If the promissory note indicates that interest will be compounded, the lender will, at stated intervals, capitalize interest.
Co-signer: A co-signer on a loan assumes responsibility for the loan if the borrower should fail to repay it.
Cost of Attendance (COA): The total cost to attend law school for one academic year (nine months), including tuition, room and board, books and other related expenses.
Deferment: Allows you to postpone payment of your loan principal or principal and interest. Deferments are usually granted for unemployment, economic hardship, and continuing education.
Deferred Interest: Accrued interest that you do not have to pay until a later date. Deferred interest will be capitalized.
Delinquency: If your payment is not received on the due date, you are delinquent. Late or missed payments generally are reported to the three national credit bureaus which affects your credit rating.
Default: If your delinquency continues for 270 days, you will default on your federal loans.
Default Consequences: The default will be reported to the three major national credit bureaus where it will be recorded on your permanent credit record. This will adversely affect your ability to obtain future credit. You may be subject to legal action by the holder of the loan, your salary may be garnished, your tax refund seized, your admission to the Bar jeopardized, and you may be unable to get additional federal or state financial aid, including student loans.
Disbursement: The release of loan funds to the school for delivery to the borrower. Disbursements are usually made in two equal installments prior to the beginning of the fall and spring semesters.
Disbursement Notification: A letter sent to you that indicates the approved loan amount, when your funds should become available, and any fees that have been deducted.
Disclosure Statement: A statement of the actual cost and terms of a loan. It includes the interest rate and all finance charges that you will pay. You will receive your first disclosure statement at disbursement and a second one a few months before repayment begins.
Electronic Funds Funds Transfer (EFT): A process whereby the funds you borrow from your lender are sent electronically to the school to be credited directly to your tuition account.
Endorser: A person who agrees to repay a loan if the borrower fails to do so. The endorser must be a creditworthy U.S. citizen, permanent resident or other eligible non-citizen. If the student secures an endorser for the Federal Graduate PLUS Loan, the endorser must sign a new Endorser Addendum for each loan requested during the period in which the student has adverse credit.
Entrance Interview: A loan repayment and debt management counseling session required by federal regulations for students who are receiving their first federally guaranteed student loan.
Exit Interview: A loan repayment and debt management counseling session required by federal regulations for students who have received federally guaranteed loans while attending school. This counseling session must be conducted before the student graduates or leaves the school.
Federal Consolidation Loan: A loan created by the Department of Education by combining your existing federal student loans into one new loan, with a new interest rate. Consolidation usually extends the repayment term from 25 to 30 years, thereby lowering your monthly installments, but the total amount you repay will be higher.
Federal Family Education Loan Program (FFELP): FFELP was a public-private partnership created by Congress to deliver and administer guaranteed education loans for students and their parents. Prior to 7/1/10, FFELP provided Stafford, PLUS and Federal Consolidation Loans. After that date, all Federal loans are borrowed directly from the Federal government through the Department of Education.
Forbearance: Granted at the lender’s option, it is an agreement to accept a temporary cessation of loan payments, an extension of time for making payments, or smaller payments than were previously scheduled. During a forbearance, interest will continue to accrue and must either be paid by the borrower or it will be capitalized, i.e., added to principal.
Garnishment: The deduction of a portion of a borrower’s paycheck, with or without the borrower’s consent, which action a lender or the government may take to force repayment of a loan that is in default.
Grace Period: The period of time that begins when the student ceases to be enrolled at least half-time and ends the day before repayment begins. No payments are due during the grace period.
Grad PLUS Loan: This is a fixed rate Federal loan that should be considered after you have borrowed through the Federal Direct Loan Program. The interest rate is adjusted annually but is fixed for the life of the loan.
Grant: A grant is a gift, which does not have to be repaid, to help defray the cost of tuition.
Guarantor: An agency that insures lenders against losses due to a borrower’s failure to repay a loan by default, death, disability or bankruptcy.
Guarantee Fee: A percentage of principal charged to the borrower by the Guarantor.
Higher Education Services Corp. (HESC): HESC is a New York State agency that helps people pay for college by administering the Tuition Assistance Program (TAP), and guaranteeing student loans. HESC also provides loan repayment assistance/loan forgiveness programs to law graduates.
Interest: The price paid or fee charged to borrow money. Interest rates on Federal Direct Loans and Federal Direct Grad PLUS loans are fixed. However, the interest rate is adjusted annually but remains fixed for the life of the loan. Private loans have variable interest rates.
LIBOR (London Interbank Offered Rate): It is the average of the interest rates paid on deposits of U.S. Dollars in the London, England, financial market. Many private education lenders base their rates on the LIBOR Interest Rate Index, plus a certain percentage.
Loan Servicer: A company that specializes in student loans and is hired by lenders and secondary markets to handle billing, collections, deferments, and other administrative duties. Student loans are often assigned to a servicer.
Master Promissory Note (MPN): The MPN is a legally binding contract between the borrower and the lender of either a Federal Direct or Direct Grad PLUS Loan whereby the borrower agrees to repay the loan. It contains the borrower's rights, responsibilities and obligations as a borrower. Once the borrower signs an MPN for a particular loan, a new one is not required. Borrower's should keep copies of their promissory notes as a record of what was agreed upon for each loan.
Negative Amortization: Occurs when the amount of the borrower's monthly payment is less than the amount of interest that accrued on the loan for that period. When this occurs, the unpaid interest may be added to principal at some point, thereby increasing the amount of the debt.
Origination Fee: A processing fee, calculated on the principal amount borrowed, that is charged to the borrower by the lender. This fee is normally deducted from the amount of the loan proceeds at disbursement, but may be deducted at repayment.
Principal: The total amount borrowed, including fees and capitalized interest. It is the amount upon which interest is charged.
Promissory Note: A legal document signed by the borrower when obtaining a loan. It contains all the terms and conditions of the loan.
Simple Interest: Formula: Principal x Interest Rate x Time = Interest.
Secondary Market: The term used to describe a company that is in the business of buying student loans from lenders. The organization that purchases the loan may service the loan or contract with a separate servicer to do so.
Subsidized Loans: Loans upon which the interest is paid by someone else while the borrower is in school at least half time and during the grace period, e.g., the government pays the interest on the Subsidized Federal Direct Loan. After July 1, 2012, graduate students are no longer eligible to borrow the Federal Direct Subsidized Loan.
Unsubsidized Loans: Loans upon which the interest accrues beginning at disbursement. Interest on an unsubsidized loan can either be paid while the borrower is in school, or it can be deferred until graduation or withdrawal from school. If the interest is deferred, it will be capitalized, i.e., added to principal, at repayment.
U.S. Department of Education: The Federal agency that provides and administers the Direct, Direct Grad PLUS, and Direct Consolidation Loan Programs. The Department of Education produces, distributes and processes the Free Application for Federal Student Aid (FAFSA) which is used to determine your Federal loan eligibility.
Variable Interest: A loan interest rate that is tied to a certain index (91-Day T Bill, Prime Rate or LIBOR) and which changes at regular intervals. For each loan, borrowers should be aware of how the interest is accruing, either at a fixed or variable rate. If it is a variable rate, know how often the rate will vary.