Student Loan Terminology

It may help to understand the following terms if you plan to apply for student loans:

• Interest-free to borrower during school, grace, and authorized deferment periods (such as at least half-time enrollment)
• Federal Subsidized Stafford is the most common example for graduate business students
• These are generally not loans you would pay off early. If your repayment strategy includes early or aggressive repayment, you may want to repay your private or unsubsidized federal loans first.

• Interest accrues from date of disbursement and throughout school, grace, and authorized deferment periods
• Examples include Federal Unsubsidized Stafford, Grad PLUS, private loans
• In general, these would be the loans you would pay off early, if your repayment strategy includes early or aggressive repayment

• Addition of any accrued and unpaid interest to the principal amount you borrow
• For example, you borrow $10,000 at 10% per year, accrued interest over one year is $1,000, and capitalization occurs annually; $1,000 will be added to $10,000 after one year, resulting in a new principal of $11,000, on which interest now accrues
• Less frequent the better
• Often occurs at a status change (grace, deferment, forbearance)
• Often occurs more frequently during forbearance periods
• Can greatly increase your total amount due over time

• Discounts, often in the form of Interest Rate Reductions (IRRs), offered by some lenders on various loans
• Examples include discounts for automatic debit and timely payment
• Recent changes in the student loan industry have resulted in fewer Borrower Benefits being offered on new loans

• Credit Ready means the borrower has a satisfactory credit history and does not show adverse items in their credit history such as, for example, 90-day-late payments or unpaid collection accounts; Grad PLUS Loans are based, in part, on a borrower being Credit Ready.
• Credit Worthy looks at a borrower’s FICO score and (sometimes) their income; lenders evaluate risk by reviewing a borrower’s repayment history and their current ability to repay new financing. Most private loans will require you to be Credit Worthy.

• Stafford and Grad PLUS Loans are made by private lenders such as banks, credit unions, and some nonprofit groups
• Borrower has a choice of lenders
• Schools may offer a Preferred Lender List for your convenience, but you may still choose any FFELP lender you want
• Sometimes referred to as the “Guaranteed Student Loan Program”

• Stafford and Grad PLUS Loans are made “directly” by the federal government
• Lender is selected made by your school; you will not need to select a lender for your federal loans if your school participates in the Direct Loan Program