Glossary
Ability-to-Benefit
One of the criteria used to establish student eligibility in order to receive government student assistance is that a student must have earned a high school diploma or its equivalent. Students who are not high school graduates (or who have not received General Education Certificates) can demonstrate that they have the “ability to benefit” from the education or training being offered by passing an approved ability-to-benefit (ATB) test. Serious problems with ATB tests can be the basis of an application for a loan cancellation due to ATB fraud.
Acceleration
When a creditor claims the total balance of a loan is due immediately. This cannot usually occur unless the borrower has fallen behind on payments.
Annual Percentage Rate
The interest rate on a loan expressed under rules required by federal law. It is more accurate to look at the annual percentage rate (as opposed to the stated interest rate) to determine the true cost of a loan, because it tells you the full cost of the loan including many of the lender’s fees. For private student loans, you will find the annual percentage rate for a loan on the disclosure statement that is given to you when the loan papers are signed.
Answer
In a lawsuit, this is a legal document that the defendant must file to respond to the claims being raised. There are often short time deadlines to file an answer.
A legal process that allows a creditor to “attach” a lien to property that you own. Depending on state law, almost any kind of property may be subject to attachment, including your home, automobile, bank accounts, and wages. Once a lien is attached to the property, you may face further collection action on that property, including execution and garnishment.
Bankruptcy
A legal process available in all states that allows consumers to address debt problems according to a set of special rules while getting protection from continued collection activity.
Cancellation (also known as “discharge”)
Loan cancellations wipe out your current loan and also allow you to get back any money paid on the loan and any money that was taken through tax refund intercepts, wage garnishment, or other collection methods. In most cases, the government is also required to delete negative references on your credit report. Cancellations for federal students loans are only available in limited circumstances. If you have a private loan, you will need to contact your lender or current loan holder to discuss possible cancellation options.
Capitalization occurs when items owed on a loan are treated as part of a new principal balance. When arrears are “capitalized,” the amount of the arrears is included in the principal before the interest rate is applied. Often, capitalization and reamortization go hand in hand. If the arrears are “capitalized” and the loan is “reamortized,” your lender will recalculate your payment using the existing interest rate and the new principal balance.
Chapter 7 Bankruptcy
See liquidation.
Chapter 13 Bankruptcy
See reorganization.
Property put up to secure a loan. If you have given a creditor collateral, that creditor can normally take and sell the collateral if you are not able to repay the loan. A creditor with collateral is normally known as a “secured creditor.”
Also known as “judgment proof”, this term is applied to people or businesses with property of minimal value, which can be entirely protected by exemptions. If you are collection-proof, it is difficult or sometimes impossible for any creditor to force you to pay a debt.
Complaint
A document beginning a lawsuit. A complaint normally includes a statement of all of the claims being raised by the person bringing the lawsuit.
Consolidation
Consolidation loans allow borrowers to combine different types of federal student loans to simplify repayment. Consolidation is similar to refinancing of a loan. Borrowers have the option to consolidate all, just some, or even just one of their existing student loans. There is generally no minimum or maximum size for a Direct Consolidation Loan. Not all student loans are eligible for consolidation and generally, once loans have been consolidated they cannot be consolidated again.
Cosigner
A person who agrees to be responsible for someone else’s debt. A cosigner is normally responsible for paying back a debt just as if he or she had received the money.
Cost of Attendance
This is the total, as estimated by the college, of: tuition and required fees; room and board (rent and food); books and supplies; transportation; and miscellaneous personal expenses (including computer expenses). Institutions do not necessarily use consistent methods of estimating these amounts, but the U.S. Department of Education does issue guidelines for what campuses may include.
Counterclaim
A response to a lawsuit in which the person being sued raises legal claims against the person (or business) which started the case.
Credit Bureau (also called consumer reporting agency or credit reporting agency)
This is a company that receives information about a consumer’s credit history and keeps records that are available to those seeking data about that consumer.
Credit Report
Also called a consumer report or a credit record. This is the information about a consumer that a credit bureau has on file that it can report to others. The report includes the credit history and current status of a consumer’s monthly payment obligations and public information such as bankruptcies and court judgments.
Credit Score
A credit score (sometimes called a “FICO” score), is a number that summarizes your credit history. The purpose of the score is to help lenders evaluate whether you are a risky borrower.
Creditor
Any person or business to whom you owe money.
Cure a Default
If you have defaulted on a debt, this is a process for correcting the default. Most often, a “cure” refers to getting caught up on missed payments. A cure may also be called reinstatement.
Debt Collector
The most common use of this term applies to anyone who collects debts. However, under the federal Fair Debt Collection Practices Act (FDCPA), the term only applies to collection agencies and lawyers (or their employees) that are collecting debts for others. State laws may cover other types of collectors.
Debtor
Any person who owes money to another.
Debtor’s Examination (also known as “post-judgment process,” “asset examination,” and “supplementary process”)
This is normally a court ordered proceeding in which a debtor must appear in court or in an attorney’s office to answer questions about current income and assets from which a judgment may be collected. In many states, failure to appear at a debtor’s examination can result in an arrest warrant.
Default
Failure to pay a loan according to the terms agreed to in the promissory note. For FFEL and Direct Loans, default occurs if a borrower fails to make a payment for 270 days if the loan is repaid monthly.
Defendant
In a lawsuit, this is the person or business that is being sued.
Defense
A legal reason why a court should not award any or all of what is requested in a lawsuit. For example, a statement that the money is not owed is a defense to a collection lawsuit.
Deferment
Deferments allow eligible borrowers to postpone paying back their loans in certain circumstances. This is an extremely useful option particularly for subsidized Stafford loans, because interest does not accrue on those loans during the deferment period.
The government considers family resources of dependent students in determining financial aid amounts.
Borrowers are considered dependent if they are less than 24 years old by December of the award year, at least one of their parents is still alive and they:
- Are not enrolled in a masters of doctoral degree program,
- Are not married on the day of application,
- Are not veterans of the U.S. Armed Forces,
- Do not have children who receive more than half their support from them, or
- Do not have dependents other than children or a spouse who lives them and receive more than half their support from them at the time of application
Student loans that are made directly by the federal government to students, with the assistance of the school or other entity that originates the loan. Lenders and guaranty agencies are not involved in the process.
Discharge
See cancellation.
Disclosure Statement
This term is commonly used to refer to the document that explains loan terms according to the Truth in Lending Act.
Equity in property is the amount of cash you would keep if you sold property and paid off all of the liens on that property. For example, if you own a house worth $100,000, but you owe $60,000 on your original mortgage and $10,000 on a second mortgage, you have $30,000 in equity. The same principle applies to cars and other types of property.
Property that the law allows you to keep when you are being faced with collection on an unsecured debt.
These are laws that give you the right to keep your exempt property.
Expected Family Contribution (EFC)
The amount a family and student are estimated to be able to contribute toward college expenses, based on either a federal formula (known as Federal Methodology or FM) or an alternative formula (known as Institutional Methodology or IM). For dependent students, the EFC is comprised of a “parent contribution” and a “student contribution.” The amount depends on many factors and can be adjusted by financial aid administrators based on a student’s special circumstances. For an example of how the federal formula works, here are some example EFCs for dependent students. (see XAP for the specific situations on which these are based):
Family income $32,000 EFC: $818
Family income: $50,000 EFC: $4,456
Family income: $100,000 EFC: $9,382
Family income: $200,000 EFC: $27,839
To determine an estimated EFC based on a specific family scenario, see the calculators available on colleges’ sites and at Finaid! and the College Board.
Fair Debt Collection Practices Act
A federal law that governs the conduct of debt collectors and that prevents many abusive collection tactics.
This program allows the government to take certain Social Security benefits, benefits under Part B of the Black Lung Act, and some Railroad Retirement benefits to collect federal government student loans.
Federal Family Education Loans (FFEL)
These are guaranteed student loans made by private lenders. The government reimburses the lender when borrowers default, or otherwise fail to pay back the loan. Before getting reimbursed, lenders are required to make certain efforts to collect the loans.
Fixed-Rate Loan
A loan on which the interest rate is set for the term of the loan.
Forbearance
Forbearance involves a loan holder agreeing to a temporary stoppage of payments, an extension of time for making payments, or acceptance of smaller payments. Interest continues to accrue during a forbearance period.
A creditor’s seizure, to satisfy a debt, of property belonging to the debtor that is in the possession of a third party. Usually a court has to authorize the seizure in advance. However, this is not required for the government to garnish wages through administrative wage garnishment to collect defaulted student loans. There are notice and other requirements that the government must follow, in this case, but no court judgment is necessary.
A state or private nonprofit agency that has an agreement with the Secretary of Education to administer the FFEL program. The agency insures lenders against losses due to a borrower’s default. Also called “guarantor” or “guarantee agency.” For the name, address, and telephone number of the agency in any particular state, contact the Federal Student Aid Information Center at 1-800-4-FED-AID. For a list of state guaranty agencies, click here.
Homestead Exemption
The right, available in most states and in the bankruptcy process, to treat your residence as exempt property that cannot be sold to satisfy the claims of unsecured creditors. In most states, the homestead exemption covers a certain dollar amount of your equity in your residence. A home cannot normally be sold to pay claims of your creditors unless your equity in the home exceeds the amount of the exemption.
The government will not consider family resources of independent students in determining financial aid amounts.
Borrowers are independent if they:
- Are 24 years old or older by December of the award year,
- Will be enrolled in a masters or doctoral degree program,
- Are married on the day of application,
- Are veterans of the U.S. Armed Forces,
- Have children who receive more than half their support from them,
- Have dependents other than children or a spouse with lives with them and receives more than half their support from them at the time of application, or
- Both parents are deceased.
A published rate often used to establish the interest rate charged on variable rate loans or to compare investment returns. Examples of commonly used indexes include Treasury bill rates, the prime rate, and LIBOR (the London Interbank Offered Rate).
Insolvent
A person or business that does not have sufficient assets to pay its debts.
Interest
The cost of borrowing money over time. Interest rates are expressed as a percentage.
A determination by a court as to the outcome of a lawsuit, including any amounts owed.
Judgment Lien
A lien that attaches to property as the result of a judgment. For example, if you lose a collection lawsuit, the creditor normally has the right to an attachment on any real estate that you own.
Judgment-Proof
See collection-proof.
Also called a “security interest,” it is a legal interest taken by creditors in your property to secure repayment of a debt. A creditor with a lien is called a secured creditor.
Sale of property to pay creditors. The term is also used as a shorthand name for the chapter 7 bankruptcy process, even though property is not always sold in that bankruptcy process.
Margin
The number added to the index to determine the interest rate on an adjustable rate loan. For example, if the index rate is 6%, and the current note rate is 8.75%, the margin is 2.75%.
National Student Loan Data System
This is the Department of Education’s database for federal student financial aid. NSLDS receives data from schools, guaranty agencies and from the U.S. Department of Education. See www.nslds.ed.gov.
Negative Amortization
Negative amortization occurs when your payments do not cover the amount of interest due for that payment period.
Origination Fee
A fee paid to a lender for processing a loan application. It is stated as a percentage of the loan amount, or “points.”
Perkins Loans
Perkins Loans (formerly called National Direct Student Loans, and before that National Defense Student Loans) are low-interest loans for both undergraduate and graduate students with exceptional financial need. Perkins Loans are originated and serviced by participating schools and repaid to the school. The government does not insure the loans, but instead provides money to eligible institutions to help fund the loans.
Plaintiff
This is a person or business that begins a lawsuit.
PLUS Loans
These loans are available for parents borrowing for the education of dependent undergraduate children enrolled in school at least half time. “Grad PLUS loans” are also available for graduate and professional students. Unlike Stafford loans, PLUS borrowers are generally required to pass a credit check.
Poverty Level
This is a federal measure, updated annually, of the amount of income that a family needs for basic survival. For a family of four in the contiguous 48 states, the amount is $20,650 in 2007.
Prepayment
Paying off all or part of the loan balance before it is due.
Prepayment Penalty
A fee charged by a lender if the borrower pays the loan off early.
Principal
The amount borrowed.
Promissory Note
This is a binding legal document that borrowers sign when they get a student loan. It lists the conditions of the loan and terms under which the borrower agrees to repay the loan. It includes information on how interest is calculated and what deferment and cancellation provisions are available.
Rehabilitation
Rehabilitation is a process that allows borrowers with defaulted student loans to get out of default by making a required number of on-time payments. Once payments are made, the guarantor or the Department must attempt to find a lender to purchase the loan. If the loan is sold, the loan is removed from default status and the borrower is eligible for new loans and grants.
Reorganization(Chapter 13 Bankruptcy).
This is a bankruptcy process to get relief from debts by making court-supervised payments over a period of time. The alternative is usually liquidation under chapter 7.
Stafford Loans
Stafford loans are for undergraduate, graduate and professional students enrolled at least half-time. Federal Stafford Loans are made to students through the Direct Loan program and the Federal Family Education Loan (FFEL) program.
State Tuition Recovery Funds (STRFs)
STRFs contain deposits of money collected from schools approved to operate in the state. The funds are disbursed to victimized students under specified conditions. Many states have either a STRF or a bond program to reimburse defrauded students.
Summons (also called “original notice” or “notice of suit”)
This is a document that is provided at the beginning of the lawsuit to tell the defendant what is being requested and what must be done to respond to the complaint.
A program that allows the government to take your income tax refund if you are in default on a federal student loan. A number of states also have laws that authorize state guaranty agencies to take state income tax refunds.
Total and permanent disability
This means that you are unable to work and earn money because of an illness or injury that is expected to continue indefinitely or result in death. You must be totally and permanently disabled in order to qualify for a federal student loan disability cancellation.
A federal (national) law that requires that most lenders, when they make a loan, provide standard form disclosures of the cost and payment terms of the loan.
A debt that does not involve collateral.
Variable Rate
Interest rate that changes periodically in relation to an index.
Variable-Rate Loan
This is a loan on which the interest rate can change over time. The changes can affect the amount of your monthly payments.
Wage Garnishment
Garnishment of the debtor’s wages from the debtor’s employer. The government can collect federal loans through the administrative wage garnishment program. This means that the government can garnish wages without first getting a judgment in court.