Understand Loan Terms - Iowa College Access Network - ICAN

Understand Loan Terms

Make sure you understand the important terminology for your federal student loans.

Accrued interest. Interest that has accumulated.

Capitalization. Adding unpaid interest charges to the principal balance of an educational loan, which increases the size of the loan. You are then charged interest on the new balance, including both the unpaid principal and the accrued interest. When interest is capitalized, you have a higher monthly payment and will eventually have to repay more. Try to pay the interest as it accrues so it won't be capitalized. Capitalization is sometimes called compounding.

Consolidation. One big loan from a single lender that combines several student loans. The consolidation loan pays off the balances on the other loans so you make a single payment.

Default. The state of a loan when you fail to make several regular payments on time (for example, payments overdue by 270 days) or otherwise don’t meet the terms and conditions of the loan. If you default on a loan, the lender, the state and federal government, and the college can take legal action to recover the funds, which can include garnishing your wages and withholding income tax refunds. If you default on a government loan you will become ineligible for future federal financial aid unless you’re able to arrange a satisfactory repayment plan, and your credit rating can be affected.

Deferment. Postponement of loan payments. The federal government pays the interest charges during deferment for subsidized loans; you make the interest payments during deferment for unsubsidized loans. If you cannot pay the interest charges, the interest will be capitalized, which increases the size of the loan. Most federal loans are deferred if you are in school at least half time. If you don't qualify for a deferment, you may be able to get a forbearance. You can't get a deferment if your loan is in default.

Delinquency. Failure to make loan payments on time. Late fees may be charged, and if you miss several payments, your loan will go into default.

Disbursement. The release of loan funds to the college. The payment is co-payable to you and the school. The school will credit loan funds to your account to pay tuition, fees, room and board, and other school charges. You then receive any leftover funds in cash or by check. Loan amounts of $500 or more are made in at least two equal installments.

Forbearance. A temporary postponement of payments to the principal allowed by the lender. (Interest charges continue to accrue, even on subsidized loans.) You still need to pay the interest charges during the forbearance period. Forbearances are granted at the lender's discretion, usually if you have extreme financial hardship or other unusual circumstances and don’t qualify for a deferment. You can't receive a forbearance if your loan is in default.

Forgiveness or Discharge. The cancellation of all or part of an educational loan because you meet certain criteria (for example, you perform military or volunteer service).

Grace period. A short time during which you aren’t required to begin repaying your student loans. The grace period begins with graduation, or it may begin if you leave school for a reason other than graduation or drop below half-time enrollment. Stafford Loans offer a grace period of six months; Perkins Loans have a grace period of nine months. The PLUS Loans don’t have a grace period.

Interest. Amount you pay for the privilege of using the lender's money. Interest is usually calculated as a percentage of the principal balance of the loan. The percentage rate may be fixed for the life of the loan, or it may be variable, depending on the terms of the loan.

Prepayment. Paying off all or part of a loan before it is due. You have the right to prepay federal loans at any time without penalty.

Principal. The amount of money you borrowed or still need to pay on a loan. Interest is charged as a percentage of the principal. Fees are deducted from the principal before disbursement.

Repayment schedule. Shows the monthly payment, interest rate, total repayment obligation, payment due dates and the term of the loan.

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