GLOSSARY OF TERMS

Learn the language of personal finance.

Educating yourself before making important financial decisions is critical – and we want to help you do it. That’s why we created this Glossary of Terms, covering all the important ideas and topics you may encounter along your personal finance journey.

Educating yourself before making important financial decisions is critical – and we want to help you do it. That’s why we created this Glossary of Terms, covering all the important ideas and topics you may encounter along your personal finance journey.

A

Definition / noun

An agreement with a creditor to allow them to periodically withdraw money from your credit card, debit card, checking, savings, or money market account to make a recurring payment on a bill. The amount due for the payment is automatically withdrawn according to your payment schedule. For some student loans, setting up automatic payments, or auto debit, offers an incentive such as a small discount on the interest rate charged.

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Definition / noun

The amount of income used to determine how much tax you owe in a given year. It is your adjusted gross income minus itemized or standard deductions or exemptions.

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Definition / noun

Your credit report provides a detailed list of your credit activity and credit history prepared by a credit bureau. It's free to check your credit report annually and helps you identify inaccurate or fraudulent activity.

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Definition / noun

A loan with scheduled, periodic payments that are applied to both the loan's principal amount and the interest accrued. You'll pay more interest than principal initially, and gradually have a larger portion of the payment going toward principal. Auto loans, home loans, and personal loans are typically amortized.

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Definition / noun

The interest on a loan or bond that has accumulated as of a specific date but has not yet been paid by the borrower. Interest may be accruing on the loan even if there are no payments due. This unpaid accrued interest eventually gets capitalized, or added to the loan balance, and continues to grow.

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Definition / noun

The cost you pay each year to borrow money, including fees, expressed as a percentage of the amount you borrowed.

Why is it important?

The lower the rate, the less you pay. The higher the rate, the more you pay. APR differs from interest rate as it could be lower or higher based on different factors.

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B

Definition / noun

An estimate of your expected future income and expenses for a specific period of time (often a month). Reviewing your budget often can help you identify where you can spend less and save more. Comparing your spending to your budget can help you better manage your finances.

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Definition / noun

A person who takes out a loan from a bank or lender and agrees to pay it back according to the terms of the loan agreement, usually with interest.

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C

Definition / noun

A transaction that allows one party to receive money, goods, or services in return for a promise of future payment. These transactions include paying back the amount spent plus interest and fees to the credit grantor within an agreed-upon time.

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Definition / noun

A report containing information gathered by a consumer reporting agency about your reputation, lifestyle, character, and personal characteristics, as well as your credit history, creditworthiness, and credit capacity. Potential employers, lenders, landlords, insurance companies, and others use consumer reporting to make decisions about their interactions with you.

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Definition / noun

The person who cosigned on a loan for you is removed from the agreement and no longer considered partially responsible for the debt. This may be possible once you prove you're capable of making payments on your own and typically applies to private student loans that may require a cosigner for college students who have limited credit history.

Why is it important?

It may allow you to secure a cosigner if the cosigner knows there is an option in the future that would remove them from the loan obligation. Your cosigner has an interest to ensure you are successful in repaying your loan in order for the cosigner to be released based on requirements set by the lender.

Why is it important for Student Loan Refinance?

You may no longer require a cosigner, so you can release them from your loan after 24 on-time payments along with other criteria.

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Definition / noun

Banks decide to lend you money based on your creditworthiness. It can be based on a number of factors, including FICO and credit score, debt to income levels, and the length of your credit history.

Why is it important?

It is something you need, and something you need to protect and prove when borrowing money.

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Definition / noun

A person who applies for a loan with another borrower and agrees to pay off the debt if the borrower doesn't make payments, guaranteeing the loan and reducing the risk for the lender. Using a cosigner may help a borrower obtain a loan or receive a better rate for a loan than if they applied alone.

Why is it important?

A cosigner may be required to ensure you can obtain a loan or potentially receive a better rate.

Why is it important for Student Loan Refinance?

You likely needed a cosigner for school loans, but now have an established career and credit profile, so you may no longer need a cosigner. But you could use one for a potentially lower interest rate. If you choose to include a cosigner, they could still be released after 24 on-time payments, along with other criteria.

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Definition / noun

A score based on analysis of your credit report that is used to determine your creditworthiness, or suitability to receive financial credit. It impacts your ability to borrow money for a home, auto, private loans for college or refinance loans - and the terms and interest rate you receive - because lenders use it to assess the risk of lending you money. Sometimes called FICO score.

Why is it important?

A better credit score may help you earn better credit options, including lower interest rate and more flexible payment terms. It's also helpful to know what primarily impacts your credit score - such as making your payments on time, how much credit you have, and length of credit history.

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D

Definition / noun

A document given to a participant in a financial transaction that explains important information in plain language.

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Definition / noun

The amount of your income that is left for spending, investing, or saving after paying for personal necessities and taxes. When discretionary income is a factor used to determine your eligibility for certain student loan repayment plans or rehabilitation, it is the calculated as the difference between your annual income and a percentage of the poverty guideline for your family size and state of residence.

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Definition / noun

The payment of money from a fund. When funds from your student loan are paid from your lender to your school, it is called a disbursement.

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Definition / noun

A type of federal student loan available to undergraduate students with financial need. With this type of loan, the borrower isn't responsible for paying the interest while they're in grace, deferment, or in school at least half-time. To qualify, you must complete the FAFSA® form.

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Definition / noun

A federal unsubsidized loan offered at a fixed rate and used by graduate or professional students and parents of dependent undergraduate students to pay for their education. The borrowing limit for a PLUS loan is the cost of attendance (minus any other financial aid).

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Definition / noun

A temporary postponement of your loan payment that is allowed under certain conditions. During this time, the borrower does not have to pay interest or principal on the loan. Depending on the type of loan, interest that accrues and is unpaid may or may not be capitalized.

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Definition / noun

Failure to repay a loan as agreed in the promissory note. Most federal student loan default occurs when payment hasn't been made in more than 270 days. Default can have legal consequences and result in a loss of eligibility for additional federal student aid.

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Definition / noun

The process of pursuing payment of loan debts due by borrowers.

E

Definition / noun

In banking, an endorser is a person who endorses a check and the endorsee is the person to whom the check is endorsed. With loans, the endorser is a person with good credit who agrees to repay the promissory note if the borrower does not repay it. Endorsers cannot be the student on whose behalf the parent is borrowing a Federal Parent PLUS Loan.

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F

Definition / noun

A FICO score is a three-digit number between 300 and 850 that is based on information in your credit reports. FICO is a standard scale designed to measure your creditworthiness - and it's used by lenders to help them evaluate how likely you are to repay a loan.

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Definition / noun

The ability to understand and use financial skills, including how to handle personal finances, budget, save, and invest so you can make knowledgeable, effective decisions.

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Definition / noun

A period of time when your monthly loan payments are temporarily stopped or reduced. Interest will continue to be charged on your loans during this time. Any interest you don't pay during this time will be capitalized (added to your principal balance) at the end of your forbearance period.

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Definition / noun

Your credit report provides a detailed list of your credit activity and credit history as reported by your lenders and creditors to a credit bureau. It's free to check your credit report annually, and this helps you identify inaccurate or fraudulent activity. Potential creditors use your credit report to assess your creditworthiness as they decide whether to extend credit to you, and at what terms.

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Definition / noun

The duration of a loan until it is paid off - for example, 60 months for an auto loan or 30 years for a mortgage. With a shorter loan term, you'll pay less interest overall but your payments will likely be higher because the principal balance is spread out over fewer months. Also referred to as loan term.

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Definition / noun

An interest rate on a loan that stays the same for the life of the loan. Since the interest rate doesn't fluctuate with a fixed interest rate, the borrower can predict future payments.

Why is it important?

Since the interest rate doesn't fluctuate with a fixed interest rate, the borrower can predict future payments.

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Definition / pronoun

The largest federal grant program offered to undergraduates. Funds given under this program generally do not have to be repaid, except under certain circumstances. For more information, go to https://studentaid.gov/understand-aid/types/grants/pell.

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G

Definition / noun

Your total income before deductions.

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H

Definition / noun

A period during which your monthly loan payments are temporarily reduced or suspended. This type of forbearance may be granted if you're willing but unable to make loan payments due to certain types of financial hardships and do not qualify for a deferment or other type of forbearance. During this time, interest continues to accumulate, or accrue. Unpaid interest that accrues during the forbearance will be capitalized (added to your principal balance), increasing the total amount you owe.

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Definition / noun

A home equity line of credit (HELOC) is a line of credit secured by your home that gives you a revolving credit line that you can tap into as needed up to a certain credit limit. HELOCs have a variable interest rate and can be used for home improvements, large expenses, or to consolidate or pay off debt such as credit cards or loans with higher interest rates.

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Definition / noun

A request by a creditor to look at your credit file to determine how much risk you pose as a borrower. This happens when you apply for a new line of credit, such as a credit card or loan. It can lower your credit score by just a few points or as much as 10 points.

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I

Definition / noun

A loan expense charged for the use of borrowed money. Paid by a borrower to a lender, interest is calculated as a percentage of the unpaid principal amount of the loan.

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Definition / noun

Interest rate is the cost of borrowing money. Example 7% * 5,000 = $350 interest

Why is it important?

The lower the rate, the less you pay. The higher the rate, the more you pay.

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J

Definition / noun

The percentage of a school's graduates who are employed in the occupation for which they were trained or in a related, comparable occupation within a certain timeframe after receiving their degree or certificate.

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L

Definition / noun

An organization that makes the loan and supplies the funds to a borrower. This can be the borrower's bank or other financial institution, a state agency, or the federal government.

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Definition / noun

Money borrowed from the federal government, state agencies, or a private source like a bank or financial institution. It must be paid back on the terms agreed to, with interest.

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Definition / noun

The removal of a borrower’s obligation to repay a some part or all of their loan under certain circumstances. It is usually based on the borrower's not being responsible for the debt due to fraud or inability to pay the debt due to death, disability, or bankruptcy.

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Definition / verb

A situation in which you're no longer obligated to make some or all of your loan payment; loans may be partially or fully forgiven. Depending on the type of loan forgiven, it may be taxable as cancellation of debt income. There are several situations under which federal student loans may be partially or completely forgiven. You can learn more at https://studentaid.gov/manage-loans/forgiveness-cancellation.

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Definition / noun

The duration of a loan until it is paid off - for example, 60 months for an auto loan or 30 years for a mortgage. With a shorter loan term, you'll pay less interest overall but your payments will likely be higher because the principal balance is spread out over fewer months. Also referred to as finance term.

Why is it important?

If you have a shorter term the positive is you pay less interest. If you have a longer term the positive is you have a lower payment. Lower payment/higher total cost vs. higher payment/ lower total cost.

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M

Definition / noun

What you pay each month to your lender to repay your loan. The amount of your monthly payment depends on how much you borrowed, your interest rate, and the loan term.

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O

Definition / noun

A fee charged by a lender to offset the cost of processing the loan. Origination fees are typically taken out when your loan is disbursed. When comparing private loan options, it's important to find out whether origination and other fees will apply.

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P

Definition / noun

An unsubsidized Direct PLUS loan made to the eligible parent(s) of an eligible dependent undergraduate student. If a student's parents cannot get a parent PLUS loan, the student may be eligible to receive additional unsubsidized loans.

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Definition / noun

A form of installment credit that provides a one-time payment of cash to the borrower. This cash may be used to pay off other debts or for other purchases.

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Definition / noun

A loan issued by a private lender or credit union and backed by the Small Business Administration (SBA). These loans help businesses keep their workers employed during the COVID-19 crisis.

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Definition / noun

The original sum of money borrowed in a loan or placed into an investment.

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Definition / noun

A financing option for higher education that can supplement use of federal loans, such as Stafford loans, Perkins loans, and PLUS loans.

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Definition / noun

A legal document that contains a written promise to pay a specific sum of money to a particular person (or lender) within a certain timeframe. The promissory note includes the terms and conditions for repayment and the borrower's rights and responsibilities.

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Definition / noun

Public Service Loan Forgiveness (PSLF) is a program that forgives the remaining balance on your federal Direct Loans after you make 12 qualifying monthly payments under a qualifying plan repayment plan while working full-time for an eligible public service employer (e.g., school, public hospital, government, qualifying nonprofit organization, etc.).

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R

Definition / noun

The process of paying back money you borrowed by making scheduled payments to a loan holder or servicer.

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S

Definition / noun

The basic repayment plan for the Direct Loan and Federal Family Education Loan (FFEL) Programs. Payments are fixed and made for up to 10 years (10–30 years for Consolidation Loans). For more information, visit https://studentaid.gov/manage-loans/repayment/plans/standard.

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Definition / noun

The combining of multiple student loans into one new student loan. With the new loan, you have just one new monthly payment. A Direct Consolidation Loan allows you to consolidate multiple federal student loans, including Stafford Loans, PLUS Loans, and Federal Perkins Loans into one single debt at no cost to you. Private lenders also offer student loan consolidation options. Understand and evaluate the various features and benefits of your current loans, and any potential benefits you may lose by consolidating federal education loans into a new private loan.

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Definition / noun

Money owed on a loan or loans that were taken out to pay for educational expenses.

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Definition / noun

A temporary pause on the requirement to make student loan payments; this applies to principal and interest of your loan. This lets you postpone payments or reduce them if you're returning to college, entering an internship or residency, or for certain other reasons.

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Definition / noun

A way to suspend or lower your federal student loan payments temporarily - typically for 12 months or less - if you don't qualify for deferment. Depending on the type of loan(s) you have, interest may accrue during a forbearance, and any unpaid interest will be capitalized, or added onto your principal balance - adding to the total amount you pay. Some private student loans may offer forbearance, while others may not.

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Definition / noun

The amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed to pay for college. Student loan interest rates for new Direct Loans are set each year by Congress. Private student loan interest rates are set by individual lenders.

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Definition / noun

A loan used by a student to help pay for college. A student loan can enable you, as a student, to attend classes and pay back your loan at a later date, with interest.

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Definition / noun

Also called a soft credit check or soft credit pull, a soft inquiry happens when you or someone you authorize (like a potential employer) checks your credit report. They can also happen when a company such as a credit card issuer or mortgage lender checks your credit to preapprove you for an offer. They don't impact your credit score.

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T

Definition / noun

A discharge in which a student loan borrower is relieved from having to repay their federal student loans and/or complete their Teacher Education Assistance for College and Higher Education (TEACH) Grant service obligation. Through the application process, he or she must show they are totally and permanently disabled, and provide documentation.

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U

Definition / noun

An unsecured loan doesn't require any type of collateral - or assets used by the borrower as security - to obtain the loan. Instead, unsecured loans are approved by lenders based on the borrower's creditworthiness.

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Definition / noun

Income you are not required to pay taxes on, such as Supplemental Security Income, child support, or federal or public assistance.

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V

Definition / noun

Also called a "floating" or "adjustable" rate, a variable interest rate on a loan fluctuates over time because it is based on an underlying index that changes periodically. With a variable interest rate loan, your loan payments will also vary over time as the interest rate changes.

Why is it important?

There are pros and cons. While it may be lower today, it could change over time, so it can be difficult to predict future costs.

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W

Definition / noun

A tax form that shows the amount of taxes that were withheld from your paycheck for the year. This is the form that you receive from your employer in order to file your federal and state taxes. If you have more than one employer in a year, you will get one form from each employer.

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Definition / noun

A tax form used by employers or others to verify the name, address, and tax identification number of a person receiving income. This form lets you send your Tax Identification Number to another person, bank, or other financial institution. Information from this form is used to generate a 1099 tax form, which is required to file your income taxes.

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Definition / noun

A deduction or collection of tax at the source of income and paid or remitted directly to the federal, state or local tax authorities as an advance tax payment. The amount withheld is impacted by the employee's income, marital status, number of dependents, and information provided on their W-4.

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Definition / noun

The tax form you complete for your employer to determine how much should be withheld from your paycheck for federal income taxes. It's a good idea to complete a new W-4 when your financial or personal situation changes.

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