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STEP BY STEP: COLLEGE AWARENESS AND PLANNING: LATE HIGH SCHOOL
National Association for College Admission Counseling (NACAC)
Student Bulletin
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Jan/Feb 2012 High School Edition
Key Loan Terms
Federal education loans, including both student loans and parent loans, are available direct from the federal government
and are administered by your college. Private student loans, sometimes called alternative loans, are available from a
private lender (like a bank) and have interest rates and repayment terms set by the lender and not the government. Here
are loan terms you need to know:
Annual Percentage Rate (APR): The APR is the overall
cost of borrowing money, expressed as an annual
percentage of the loan balance. The APR calculates the
combined impact of the interest rate, loan fees, capitalization
of interest (the addition of unpaid interest to the principal) and
other repayment terms.
Cancellation: Some loan programs provide for cancellation
(forgiveness) of the loan under certain circumstances, such
as death or total and permanent disability of the borrower.
Capitalization: Capitalization is the practice of adding
unpaid interest charges to the principal balance of an
education loan, thereby increasing the size and cost of the
loan. Interest is then charged on the new balance, including
both the unpaid principal and the accrued interest. Interest
can be capitalized monthly, quarterly, annually or when the
loan enters repayment. Capitalization causes interest to be
charged on top of interest.
Consolidation: A consolidation loan combines one or more
eligible federal educational loans into a single new loan.
Default: Default is the failure to repay your loan according to
the terms. It may lead to legal action to recover the money
and can negatively affect your credit rating. Private student
loans are considered to be in default after 120 days of
nonpayment, while federal education loans are considered to
be in default after 360 days of nonpayment.
Deferment: A deferment is a postponement of payment on a
federal loan that is allowed under certain conditions and
during which the government pays the interest on any
subsidized loans. The borrower is responsible for the interest
on any unsubsidized loans during a deferment. The
economic hardship deferment has a three-year limit.
Deferments during the in-school period are unlimited.
Forbearance: A forbearance is a period during which your
monthly loan payments are temporarily suspended or
reduced. Interest continues to accrue and will be capitalized
if unpaid by the borrower. You may qualify for a forbearance
if you are willing but unable to make loan payments due to
certain types of financial hardships. Federal loans have a
five-year limit on forbearances. Private s
have a one-year limit.
Interest: Interest is a periodic fee for borrowing money,
expressed as a percentage of the loan balance. Interest rates
are either variable (the rate can change) or fixed (the rate will
not change). The interest rate on a variable rate loan can
reset (change) annually, quarterly or monthly.
Loan Fees: Loan fees are one-time charges to originate or
guarantee a loan, expressed as a percentage of the loan
balance.
Principal: The principal is the full amount borrowed. During
repayment, it refers to the portion of the original loan amount
still owed (not including interest or fees).
Promissory Note: A promissory note is a binding legal
document you sign when you get a student loan. It contains
the loan terms and conditions under which you’re borrowing
and the terms under which you agree to pay back the loan. It
may also mention deferment and cancellation provisions
available to the borrower.
Subsidized: The government pays the interest on subsidized
loans while the student is in school, during the six-month
grace period and during any deferment periods. Subsidized
loans are awarded based on demonstrated financial need.
Note: The government will not pay interest on subsidized
loans awarded in 2012-13 and 2013-14 during the six-month
grace period. The government will continue to pay interest on
these loans during the in-school and other deferment
periods.
Unsubsidized: An unsubsidized loan is a 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, which adds the interest
to the loan balance. Examples of unsubsidized loans include
the unsubsidized Stafford loan and the Parent PLUS loans.
These loans are not based on financial need or income and
may be used to pay for the family share of college costs.
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