Loan Terms You'll Need to Know

Even after being awarded grants, scholarships, work-study, and using money from savings, some families and students take out loans to pay for their remaining education expenses.

Whether you're a seasoned borrower or just beginning your financial journey, understanding loan terms is crucial for making informed decisions. VSAC's loan terms glossary is your first stop in demystifying the language surrounding borrowing and lending for student loans.

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Annual Percentage Rate (APR)

A percentage rate that reflects the amount of interest earned or charged. APR reflects the total yearly cost of taking out a loan and includes both the interest rate and any additional fees or charges associated with borrowing.

Borrower

The student or parent who signs a promissory note/credit agreement and agrees to repay a loan. Borrowers are legally responsible for the repayment of their loan(s).

Capitalization

The addition of unpaid interest to a loan’s principal balance (original amount borrowed). Unless a loan is subsidized, you’re responsible for paying the interest during all periods, starting from the date of the first loan disbursement. You can choose either to pay it as it accrues (while you’re in school or during a grace period) or let it accrue and be added to the principal balance when you begin repayment. If you allow interest to be capitalized, the total amount you repay over the life of your loan will be greater than if you paid the interest as it accrued.

Cosigner

The ability to relieve a cosigner of their loan obligation after specific criteria set by the lender is met.

Cosigner release

The ability to relieve a cosigner of their loan obligation after specific criteria set by the lender is met.

Credit bureau or consumer reporting agency

An agency that gathers and stores credit information on a consumer’s creditworthiness. If a credit score is needed for a loan application, a credit bureau produces a score based on the gathered data. If the application is accepted and a loan is disbursed, the lender also reports back to credit bureaus the amount an individual borrowed and whether the individual makes payments on time. The three largest bureaus are Equifax, Experian, and TransUnion.

Credit score

A credit score is a three-digit number that represents a borrower’s creditworthiness, categorized on a scale of Poor to Excellent (300-850) with lower numbers representing more risk.

Learn more about credit scores and request free reports from all three nationwide consumer credit reporters on the Annual Credit Report site.

CSS Profile®

The status that results when a loan is not paid back as promised according to the terms and conditions of the credit agreement/promissory note. Upon default, loans are submitted to a guaranty agency, a collection agency, or the federal government for collection. The loan balance is due, in full, at the time of default.

Default

Deferment

Entitlement to postpone payments when the borrower with a federal education loan meets specific eligibility requirements set by the U.S. Department of Education.

Direct loans

Entitlement to postpone payments when the borrower with a federal education loan meets specific eligibility requirements set by the U.S. Department of Education.

Direct Subsidized loans—loans for eligible undergraduate students who demonstrate financial need (as determined by the FAFSA). Interest does not accrue while you’re in school, in grace period, or in deferment.
Direct Unsubsidized loans—loans made to eligible undergraduate, graduate, and professional students, regardless of financial need. Interest does accrue while you’re in school, in grace period, or in deferment; unpaid interest is then added to the principal balance.
Direct PLUS loans—loans for graduate students or for the parent (biological, adoptive, or in some cases, stepparent) of a dependent undergraduate student enrolled at least half time at an eligible school. Interest accrues from the first disbursement, and unpaid interest is added to the principal balance.

Disbursement

Loan disbursement refers to the process of a lender releasing the agreed-upon loan funds. This can occur in a lump sum or in installments, depending on the terms of the loan agreement. The disbursement is typically made after the borrower has met all the necessary conditions and requirements set by the lender, such as providing required documentation and signing loan agreements.

Generally, the money is sent to the college or training program to be applied directly towards tuition and fees owed. If there are funds remaining after covering the program costs, the college or program will release the remaining amount to the borrower.

Federal Direct Subsidized Loan (sometimes called the Subsidized Stafford Loan):

Students must complete a FAFSA to be offered a federal loan. This is the least expensive federal student loan option. That’s because the federal government pays the interest on the loan while the student is in school at least half-time, during a 6-month post-enrollment grace period, and during periods of deferment. This loan is available to undergraduate students with demonstrated financial need. The loan is taken out in the student’s name, and the student is responsible for repayment.

Federal Direct Unsubsidized Loan (sometimes called the Unsubsidized Stafford Loan):

Students must complete a FAFSA to be offered a federal loan. These loans offer fixed-rate interest and flexible repayment benefits such as a 6-month grace period, and deferment options. The loan is taken out in the student’s name, and the student is responsible for repayment. Interest begins accruing on these loans once the funds are fully disbursed.

Fees

Loans can have fees, either when the loan is made or when repayment starts, and you may end up being charged higher fees than the ones you saw advertised.

The most common fee is an origination fee, which is charged when you take out a loan. Look for no or low origination fees.

Free Application for Federal Student Aid (FAFSA)

The federal application that all students must complete in order to be considered for financial aid, including education loans from the federal government and state grants from VSAC. Many colleges also require this form to help determine financial aid offers to individual students.

Financial aid offer

A communication (e-mail or letter) that each college sends to inform a student of their financial aid eligibility.

Fixed interest rate

A rate that remains the same over the life of the loan.

Forbearance

A period of time during which the borrower is permitted temporarily to stop making payments or reduce the amount of each payment. The borrower is liable for the interest that accrues on the loan during forbearance. Some forbearances are entitlements for eligible borrowers; others are granted solely at the discretion of the lender.

Grace period

The time after school enrollment ends and before loan repayment begins. Federal Direct student loans have a one-time, six-month grace period.

Grants

Outright gifts of money generally awarded based on a family’s level of financial need. Grants are provided by the federal government, by your college, or by the state you live in. Vermont residents should apply for a Vermont grant through MyVSAC or call 800-882-4166 for a paper application.

Income-based repayment (IBR)

One of several long-term repayment plan options for borrowers of federal education loans; your monthly loan payments are limited to a percentage of your annual income (includes spouse’s income, if applicable). Monthly payments are adjusted annually based on changes in income and family size.

Income-sensitive repayment

An arrangement in which a monthly payment amount is based on a borrower’s income and amount of education loan debt.

Interest rate

The fee a borrower pays for the use of money that’s borrowed.

Lender

A bank or student loan company that lends money to students and parents.

Loan Terms

Specific conditions and provisions outlined in a loan agreement between a borrower and a lender. These terms define various aspects of the loan, including the amount borrowed, the interest rate, the repayment schedule, any fees or charges, and other important details. Understanding the loan terms is crucial for borrowers as they dictate the obligations and responsibilities of all parties throughout the life of the loan.

Master promissory note (MPN) or credit agreement

A legal document in which you promise to repay your loan(s), along with interest and fees, to the U.S. Department of Education or to your lender. It also explains the terms and conditions of your loan(s).

Minimum Payment

A lender defines the smallest monthly payment amount that will be acceptable. Even if the loan is small, the borrower must make the minimum payment each month until the loan has been fully repaid.

On-time payment

A payment made within a required timeframe established by the lender.

Origination (Application) fee

A fee some lenders charge to process the loan application and schedule the loan for disbursement. (VSAC does not charge origination or application fees)

Principal balance

The amount of money still owed on a loan, not including accrued interest or future interest.

Private loans

Also known as alternative or non-federal loans, these loans go by all sorts of brand names, depending on the lender. Families can use these loans to cover college costs that remain usually after having borrowed federal student loans. These loans are most often provided by nonprofit state agencies like VSAC, by your college, or by commercial lenders such as large national banks, online-only lenders, credit card companies, or credit unions.

Repayment disclosure statement or redisclosure statement

A fact sheet that shows the repayment terms of a loan. It is typically sent to a borrower when the loan is taken out, at the beginning of repayment and/or when the monthly payment has to be re-calculated to ensure the monthly payment is enough to repay the loan during the repayment term remaining.

Repayment period

The span of time during which a borrower must make regular payments of principal and interest. The repayment period begins either immediately following the final disbursement of the loan funds or following the loan’s grace period, whichever is applicable.

Scholarships

Gifts of money that do not need to be repaid. They’re provided by any group, individual, or organization that wants to offer financial support to students who are furthering their education or training. You must apply for scholarships and compete with other students who apply. By taking time to apply for scholarships, you may be able to reduce your out-of-pocket costs for college.

Student Aid Index (SAI)

An eligibility index number that a college or career school’s financial aid office uses to determine how much federal student aid the student would receive if the student attended the school. This number results from the information that the student provides in their FAFSA® form.

Teaser interest rate

An advertised interest rate that’s based on an exceptionally high credit rating. Either few borrowers actually receive this rate, or it is a very low variable rate that increases, with no maximum.

Variable interest rate

An interest rate that changes periodically in response to market conditions.

Work–study

Jobs offered by colleges, usually in offices or departments on campus, to provide students with income up to a specific dollar amount each semester.

VSAC education loans

VSAC’s fixed-rate education loans are available for parents and students to cover additional education costs not covered by federal Direct student loans. Compare VSAC rates with federal PLUS.

VSAC’s parent loan—a fixed-rate loan for parents helping to finance their student’s undergraduate or graduate education. Parent is the borrower.
VSAC’s student loan—a fixed-rate loan for students who need additional financing for undergraduate or graduate education. Student is the borrower, with a cosigner (often a parent). Cosigner release may be available to qualified borrowers.