Terms to Know
Sometimes just understanding the terminology can be difficult. We have provided a sample of terms to become familiar with when managing your medical education debt.
Alternative loans (private loans) are an alternative to government-backed loans and work more like traditional consumer loans. Because alternative loans are regulated by the government as consumer loans, they have more flexible interest rates, repayment terms and other options that may vary widely.
Capitalization is the process of adding unpaid interest to the principal balance of a loan. This will increase the outstanding principal balance of the loan and may increase the monthly payment amount.
A credit report contains detailed information on a person’s credit history, including identifying information, credit accounts, loans, bankruptcies, late payments and recent inquiries. It can be obtained by prospective lenders with the borrower’s permission to determine credit worthiness.
Failure to repay loans according to the terms agreed upon in a promissory note will default your loans. Default may also result from failure to submit requests for deferment or cancellation on time. Your loan is considered in default at 270 days past due, and the consequences are severe. If you default on your loan, your school, your loan holder and the state and the federal government may take all necessary steps to recover the money.
A temporary postponement of your repayment obligation is referred to as a deferment. Except with Perkins Loans, interest accrues during periods of deferment. The federal government will pay the interest during this period for any subsidized loans; for unsubsidized loans, the borrower may choose to capitalize the interest or pay it as it accrues. Your lender is obligated to provide you with a deferment if you meet the eligibility requirements.
Delinquency is defined as failure to make a payment on time. In addition to negatively affecting your credit rating, delinquency may result in late fees. If you fail to make payments for 270 consecutive days, the loan goes into default.
A preliminary estimate of a family’s ability to cover the cost of attendance to a particular school is the EFC. The EFC is based on the data provided in the Free Application for Federal Student Aid (FAFSA) and is subject to change based upon the school’s verification of information provided. The EFC is used as a basis in determining eligibility for federal student aid. Many schools have their own methodology to determine EFC, in addition to the government’s methodology. An EFC is provided on a Student Aid Report (SAR) based on the information a student provides in a FAFSA.
A Federal Consolidation Loan is a loan designed to make education loan repayment easier by combining existing eligible education loans into one new loan with a fixed interest rate.
This college or university office determines financial need and awards financial aid.
The financial aid package is the total amount of financial aid (federal and nonfederal) a student receives. The school’s financial aid office combines various forms of aid into a package to help meet a student’s need.
FAFSA is a form used to apply for all need-based federal aid. As the name suggests, no fee is charged to file a FAFSA.
A temporary postponement or reduction of a repayment obligation is referred to as forbearance. Interest charges continue to accrue during periods of forbearance. Forbearances typically are granted at the lender’s discretion, usually in cases of extreme financial hardship or other unusual circumstances and when a borrower does not qualify for a deferment.
The time period after separation from school and before student loan repayment begins is the grace period. The length of a grace period is dependent upon loan type. Stafford Loans have a six-month grace; Perkins Loans, nine. Private/alternative loan grace periods vary; check with your lender for more information.
The amount charged to the borrower of a loan for the privilege of using the lender’s money is the interest. It 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.
Loans are borrowed money that must be repaid with interest.
Master Promissory Notes are legally binding documents signed upon application for educational loans. The promissory note is a contract between the borrower and lender that lists the conditions under which monies were borrowed and the terms under which they will be repaid.
The Perkins Loan is a low-interest loan for both undergraduate and graduate students with financial need. It is provided with government funds, with a share contributed by the school.
Principal is the amount of money borrowed or remaining unpaid on a loan. Interest is charged as a percentage of the principal. Insurance and origination fees are deducted from this amount before disbursement.
The interest that is paid only on the principal balance of the loan and not on any accrued interest is called the simple interest. Most federal student loan programs offer simple interest. However, capitalizing the interest on an unsubsidized loan can result in being charged compound interest.
A Stafford Loan is a low-cost educational loan sponsored by the federal government. The interest rates are lower than commercial loans and are set by the government on July 1st for the following 12-month period. Stafford Loans differ from Perkins loans in that the school does not contribute to the loan.
The SAR compiles the information reported in a FAFSA to determine student eligibility for financial aid. The SAR is provided to a school’s financial aid office for use in creating an Award Letter. The SAR will also indicate the Expected Family Contribution (EFC).
The Department of Education offers low interest rate loans to students. Subsidized loans are based on financial need. Students can borrow up to $8,500 per academic year in subsidized loans. While in school and during the grace period, the government pays the interest on subsidized loans.
Unsubsidized loans are available to all students regardless of financial need. Students who receive a subsidized loan can increase the amount they borrow to $38,500 per year with an unsubsidized loan. You are charged interest on these loans while you attend school. You have the option of paying the interest as it accrues or postponing the interest payments until after you graduate, withdraw or drop below half-time enrollment.