Glossary of Loan Terms
APR: The interest rate that a borrower will pay on a loan, taking into account one time fees, as a means to measure the total cost of the loan to the borrower.
Capitalization of Interest: The practice of adding accrued, unpaid interest to the principal amount of a loan which increases the overall amount borrowed and interest paid.
Co-Borrower: A co-borrower is required for many private loans when a borrower does not earn sufficient income to repay the loan or have established a credit history. The co-borrower signs the promissory note with the primary borrower and is financially liable to repay the loan if the borrower does not.
Credit Rating/Credit Tier: A system of evaluating a borrower's ability to repay debt. The borrower's credit rating in conjunction with a credit tier system determines a borrower's financial strength and is often used to determine the interest rate and fees a borrower is charged on a loan.
Deferment: Based on certain conditions, it is a period in which loan payments are not required.
Endorser: In the case of a PLUS loan, an endorser may be used when the primary borrower has adverse credit and is not able to secure the loan on their own. An endorser is financially liable to repay the loan if the borrower does not.
Entrance Counseling: A loan repayment and debt management session required by the federal government for all first time federal student loan borrowers. The entrance counseling requirement must be completed before a student can receive their loan proceeds.
Guarantee Agency/Guarantor: A state or private non-profit organization that administers student loan insurance (guarantee) for either federal or private loans.
Lender: A bank, credit union, or other financial institution that provides loans to parents and students for educational costs.
LIBOR: The London Inter-Bank Offered Rate is based on rates that banks in London offer each other for inter-bank deposits. Private loan lenders will often use LIBOR plus or minus a percentage to determine the variable interest rate of a private educational loan.
Loan Fees: Fees which are often added or subtracted from the principal of a loan, used to cover administrative costs.
PLUS Loan: A federal loan borrowed for educational costs by a parent, adoptive parent, or stepparent of an eligible dependent, undergraduate student.
Prime Interest Rate: The variable interest rate at which banks borrow from each other. Lenders will often use the prime rate plus or minus a percentage to determine the variable interest rate of a private educational loan.
Servicer: A servicer is an agency that is contracted to perform administrative tasks on behalf of the lender, including billing, processing deferments and operating customer service centers