Time to learn a new language if you don’t. As you complete the FAFSA, apply for student loans and review documents from your school and possibly your student loan lender, you’ll likely come across all kinds of terms that are unfamiliar to you.
In an effort to help you decipher this new language, I’ve listed some common financial aid terms and their definitions below. Take a look, or consider bookmarking this page so you can refer to it as-needed.
And remember, if you don’t understand any of the terms you hear as you go through the financial aid process, don’t be afraid to ask! Check with your parents, your college financial aid office, or your lender to be sure you understand. These terms are new to most college students, and there are no dumb questions when it comes to financial aid—in fact, you’ll look a lot smarter for asking!
Alternative loans/private loans: A financing option for higher education that can supplement federally guaranteed loans offered by the federal government. These education loans are made by financial institutions, such as Wells Fargo.
Annual Percentage Rate (APR): This is the yearly cost of a loan, calculated as a percentage, that reflects all finance charges including loan interest and fees.
Cosigner / Co-borrower: This is someone who obtains a loan along with another individual. All parties are legally responsible for repayment of the loan.
Default: This happens when a borrower and cosigner fail to pay a debt obligation on a timely basis or to comply with other conditions of the promissory note or credit agreement.
Disbursement: This is the process of transferring funds from a lender to a borrower. A school’s financial aid office is most often times involved in this process.
Disclosure statement: This is the lender’s legal statement sent to you during the loan origination process. It states the amount borrowed, interest rate, finance charges, other terms, and repayment rights and responsibilities.
Grace period: This is the period of time when payments are not required on the loan, typically between the time the student leaves school (e.g., graduates) and when the loan enters repayment.
Interest rate: The specific rate that a lender charges, expressed as a percentage per year of the amount borrowed. Interest rates may be fixed or variable. A fixed interest rate is locked in and will not change during the life of your loan, whereas a variable interest rate can change over time with market conditions (i.e., monthly, quarterly, semi-annually, or annually) over the life of the loan.
Origination fee: This is a processing fee which is typically based on a percentage of the principal borrowed. That percentage is typically deducted from each disbursement. It is also considered as part of the annual percentage rate.
Principal: This is the total amount borrowed from a lender.
Promissory note or Credit agreement: A legally binding contract between the borrower and the lender which describes the loan terms, conditions, and obligations for repayment.
Repayment term: The period of time over which the loan is to be repaid. Repayment terms usually range from 10 – 20 years.
School certification: The process where the school confirms the student is enrolled and has met other eligibility requirements.
Servicer: This is typically a third-party entity that handles the billing, collection, deferment, and other administrative aspects of the loan.
Students and parents, if you’re in the midst of applying for financial aid, are there terms or concepts that you find confusing?