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Capitalization. The addition of accrued interest to the principal balance of the loan.
Default. A borrower’s failure to fulfill the agreement that the borrower signed when taking out a federal education loan. For example, you would be considered in default if you failed to make your monthly loan payment when due for a period of at least 270 days.
Deferment. A period during repayment in which the borrower is not required to make payments of loan principal.
Dependent Student. A student who does not meet the eligibility requirements for an “Independent Student.” Dependency status affects the maximum amount that a student may borrow in Stafford loans and whether a parent may take out a PLUS loan on behalf of the student.
Disbursement. The transfer of the loan proceeds to the school.
Discharge. The release of a borrower from a loan obligation.
FAFSA. The Free Application for Federal Student Aid is the form that the student (and parents of dependent students) must complete to apply for federal financial assistance, including federal student loans.
Forbearance. The period during which a borrower is permitted to temporarily cease making payments or reduce the amount of the payments. The borrower is responsible for the interest that accrues on the loan during the forbearance period. In many cases, forbearance is granted at the lender’s discretion; in other instances, borrowers are entitled to forbearance.
Grace Period. The six-month period that begins the day after a borrower ceases to be enrolled at least half time at an eligible school. During the grace period, payments of principal on Federal or Direct Stafford loans are not required. Certain PLUS loan borrowers also may defer payments for a six-month period after they, or the student for whose benefit a parent took out a PLUS loan, ceases at least half-time enrollment.
Guarantor. A private, nonprofit organization or state government entity that guarantees to the lender repayment of federal student loans. The guarantor works with borrowers whose student-loan payments are seriously past due to help them avoid default. If a borrower does default, the guarantor partially reimburses the lender, purchases the defaulted loan, and continues efforts to recover the amount owed by the borrower.
Holder. The current owner of a federal student loan.
Independent Student. A student who meets one or more of the following criteria: is at least 24 years old by Dec. 31 of the financial-aid award year; is an orphan, in foster care or ward of the court; is an emancipated minor or in a legal guardianship; is an unaccompanied youth who is homeless; is serving on active duty in the Armed Forces for purposes other than for training; is a veteran of the U.S. Armed Forces; is a graduate or professional student; is a married person; has legal dependents other than a spouse; is a student for whom the school’s financial-aid administrator determines and documents the student’s independent-student status based on the administrator’s professional judgment of the student’s unusual circumstances.
Interest. The charge made to a borrower for use of a lender’s money.
Lender. The organization that funds education loans for students and parents.
Master Promissory Note. A legally binding agreement under which the borrower promises to repay one or more loans.
Principal. The amount of money borrowed plus any capitalized interest.
Secondary Market. An organization that purchases education loans from lenders in order to replenish the supply of funds for new education loans. The secondary market obtains funds from investors and uses those funds to purchase existing education loans from lenders. The lenders then use the proceeds of those sales to make new education loans.
Servicer. An organization that contracts with a lender or other loan-service provider to administer any aspect of the provider’s participation in the loan program.