Borrowing loans can be a confusing process. You will need to understand many terms which may be unfamiliar to you. We hope that by listing many of these terms below, we can help you to better understand the terms of the loans you are borrowing.

Amortization
The process of paying off debt in regular installments over a period of time.

Annual Percentage Rate (APR)
A calculation that reflects the total cost of a loan on an annual basis. It includes interest, plus all fees. APR is useful in comparing loans with varying interest rates and fees.

Auto-debit
Repayment of a loan by auto-debit occurs when the borrower sets up an agreement with the loan servicer to deduct monthly loan payments directly from the borrower’s bank account. Lenders may offer a slight interest rate deduction for this type of payment.

Capitalization
A term used to describe a method of computing interest. To capitalize a loan means to add all interest that has accrued to the principal loan amount. Once a loan is capitalized, the new loan amount (both principal and interest) is the amount upon which interest will accrue.

Compound Interest
Occurs when interest is added (capitalized) into the loan principal. If the promissory note indicates that interest will be compounded, the lender will, at stated intervals, capitalize interest. The contrast to this is simple interest.

Co-signer/Co-borrower
A co-signer is an additional applicant added to the loan, often in order to meet credit-worthiness standards or obtain a lower rate. A co-signer on a loan assumes responsibility for the loan if the borrower should fail to repay it.

Credit-Based
Credit-based lending considers past credit history and income to determine eligibility for a loan. Repayment history, delinquencies, and length of time accounts have been established are considerations in determining a borrower’s ability to obtain a loan. The credit history of both the student (if he or she has a credit history) and the co-applicant will be reviewed. Federal Direct GradPLUS and private loans are credit based.

Credit Score/Rating
Your credit score is a number based on the information in your credit file that shows how likely you may be to pay a loan back on time — the higher your score, the less risk you represent. The higher your score, the more likely you are to qualify for credit at a low interest rate

Delinquency
If your payment is not received on the due date, you are delinquent. Late or missed payments generally are reported to the three national credit bureaus which affects your credit score/rating.

Default
If your delinquency continues for 270 days, you will default on your federal loans. Defaults are reported to the three major credit bureaus and adversely affect your credit rating and ability to obtain future credit.

Deferment
A time during which the borrower is not required to make payment. During deferment, interest will accrue on the loan, although, often, the borrower is not obligated to make payment on the loan amount.

Disbursement
The release of loan funds into the student account. Not to be confused with a credit refund. Disbursements are usually made in two equal installments prior to the beginning of the fall and spring semesters. The earliest funds can disburse to a student’s account is 10 days before the start of classes for the term.

Endorser
The same as a co-signer, a person who agrees to repay a loan if the borrower fails to do so. Used primarily in reference to Federal Graduate PLUS loans.

Federal Family Education Loan Program (FFELP)
FFELP was a public-private partnership created by Congress to deliver and administer guaranteed education loans for students and their parents. Prior to 7/1/10, FFELP provided Stafford, PLUS and Federal Consolidation Loans. After that date, all Federal loans are borrowed directly from the Federal government through the Department of Education.

Fixed Interest Rate
An interest rate which remains the same throughout the life of the loan. Loans have either a fixed or variable interest rate.

Garnishment
The deduction of a portion of a borrower’s paycheck, with or without the borrower’s consent, which action a lender or the government may take to force repayment of a loan that is in default.

Grace Period
The length of time a borrower is granted before the first payment is due. Grace period may refer to the time between disbursement of funds and the first payment if immediate repayment is required, or the length of time from the end of a deferment period to the first payment.

Interest
Money paid for money borrowed. Interest can be compound or simple.

LIBOR (London Interbank Offered Rate)
It is the average of the interest rates paid on deposits of U.S. Dollars in the London financial market. Many private education lenders base their variable rates on LIBOR, plus a certain percentage.

Loan Servicer
A company that specializes in student loans and is hired by lenders and secondary markets to handle billing, collections, deferments, and other administrative duties. Student loans are often assigned to a servicer.

Master Promissory Note (MPN)
A promissory note for Federal Stafford, Perkins and PLUS loans. The MPN is a legally binding contract between you and the Department of Education through which you agree to repay the loan money you borrow. It contains your rights, responsibilities and obligations as a borrower.

Negative Amortization
Occurs when the amount of your monthly payment is less than the amount of interest that accrued on the loan for that period. When this occurs, the unpaid interest may be added to principal at some point, thereby increasing the amount of your debt.

Origination Fee
A processing fee, calculated on the principal amount borrowed, that is charged to the borrower by the lender for services provided in connection with the funding of the loan. This fee is normally deducted from the amount of the loan proceeds at disbursement, but may be deducted at repayment.

Prime Rate
The interest rate that commercial banks charge their most credit-worthy customers, typically large corporations. the rates on many variable rate loans are determined by adding a certain percentage (determined by the bank) to the prime rate.

Principal
The total amount you borrowed, including fees and capitalized interest. It is the amount upon which interest is charged.

Promissory Note
A legal document signed by the borrower when obtaining a loan. It contains all the terms and conditions of the loan.

Refund
A check/direct deposit issued by the Bursar’s Office to students who borrow loans in excess of tuition and fees costs – for living expenses or books. Refunds can also be called: credit refunds or financial aid refunds. At Denver Law, the earliest that refunds can be issued is typically 5-6 days prior to the start of each semester.

Simple Interest
Interest that is a basic type of interest that calculated only on the principal amount of the loan over the length of time the loan is borrowed. Simple interest is not compounded into the loan principal. To calculate simple interest follow this formula: Principal x Interest Rate x Time = Interest.

Subsidized (Federal Direct Stafford loan)
The subsidized portion of a Federal Direct Stafford loan (up to $8,500 annually) has its interest paid by the federal government during the in-school (at least half-time enrollment) period, and for six months after graduation or a drop to less than half-time enrollment. The FAFSA (Free Application for Student Aid) is used to determine how much subsidized Stafford loan a student may borrow.

Variable Interest
A loan interest rate that is tied to a certain index (91-Day T Bill, Prime Rate or LIBOR) and which changes at regular intervals. These rates are typically presented to customers as Prime + 5% or LIBOR+ 3%. To compare loans that use different indexes, you have to know the value of that particular index.