Friday, January 29, 2010

Terminology in Student Loan

Stumped by the terminology used by lenders? Don’t be. Here is a list of the most common student loan terms and what they mean:

Borrower. In this case, you. The individual who is responsible for repaying a loan.

Capitalization. The interest that builds up over time and is added to your principal (otherwise known as “capitalized” inter-est). Be careful about capitalization, it can hike the total cost of your loan.

Consolidation. To merge some or all of your student loans into one über loan, with one interest rate and one payment per month.

Default. What happens if you fail to repay your loan. Usually a precursor to a bad credit rating and, consequently, financial troubles in obtaining further loans to buy a home or a car or go back to school again.

Deferment. A delay of payments on your student loan. To gain a deferment, a lender may make you prove “eligibility” criteria like being sick or unemployed.

Discharge. A release from your obligation to repay your loan permanently.

Fees. Additional expenses tacked to your total loan amount due, or subtracted from the amount of money you receive with your loan funds.

Forbearance. A time period when you can skate on your loan payments because of extenuating conditions and you do not qualify for a deferment.

Grace period. A six- or nine-month period after you leave school and have to start making regular payments on your student loans.

Interest. The fee you pay for the privilege of borrowing money from your lending institution (it’s their profit margin). Interest is based on a percentage of your total loan.

Principal. The total amount you owe on your student loan.

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