Glossary

Loan Repayment

Adjusted Gross Income (AGI) – the amount of income left after taxes and other adjustments.

College Cost Reduction and Access Act – congressional legislation passed in Sept. 2007, which created the new income based repayment program (IBR) and Public Service Loan Forgiveness.

Default – when a loan borrower fails to make several payments on time. This can result in the loan holder taken legal action against the borrower to recover their lost money.

Deferment (loans) - having your first payment on a loan delayed for a length of time typically due to continued education. For subsidized loans, the government will cover your interest during the deferment. For unsubsidized loans, the borrower is responsible for paying the loan’s interest.

Direct loans – student loans handled directly by the school with the funding coming directly from the federal government

Discretionary income – the amount of income left after spending on taxes, food, shelter, etc.

Federal Direct Student Loan Program (FDSLP) – the program that provides direct student loans i.e. the Federal Direct Stafford Loan and the Federal Direct Parent Loan for Undergraduate Students (PLUS)

Federal Family Education Loan Program (FFELP) – these loans are guaranteed by the federal government but financed by private lenders. Includes the Stafford, Perkins, and PLUS loans.

Forbearance – when payment of a loan is postponed for a certain length of time. Borrowers must still pay the interest.

Forgiveness (loans) – remaining loan debt is written off as taxable income after 25 years. This is only currently available through Income Contingent Repayment (ICR) and the upcoming Income Based Repayment (IBR).

Gross Monthly Income (GMI) – monthly income before taxes and allowances have been subtracted

Guaranteed (loans) – if the borrower fails to pay for the loan the federal government will pay in their place. This is not without consequence for the borrower.

HHS poverty level – a determined level of poverty that varies depends on the number of people in a household and the state of residence. It is a factor in determining payments for Income Based Repayment (IBR) and Income Contingent Repayment (ICR).

Income Based Repayment (IBR) – a new federal repayment program passed in Congress that goes into effect July 2009. Only those with Direct and Guaranteed Student Loans (Stafford and PLUS, specifically) are eligible. Monthly payments are determined by taking 15% of the discretionary income that is over 150% of the poverty level.

Income Contingent Repayment – repayment program only available for those with Direct loans. Monthly loan payments are capped at 20% of a person’s discretionary income over 100% of the poverty level. If the monthly payments don’t cover the interest, the unpaid interest is added to the loan annually but not exceeding 10% of the principal loan. After 25 years of payments, any remaining debt is written off as taxable income.

Income Sensitive Repayment – this program is available only for those with FFEL or Guaranteed loans. Lenders and borrowers meet and come to an agreement about what the monthly loan repayments should be capped at based on the borrower’s monthly income. The payments, though, have to at least cover the interest of the loan.

Also, there is no loan forgiveness as the borrower still has to pay back the loan in ten years, so the later payments compensate for the earlier, income-sensitive ones.

Marginal propensity to consume - percentage of every dollar of earnings that a person spends. If MPC is .6 that means that out of every dollar, the person spends 60 percent of it – 60 Cents. There is 40 cents left which generally goes to savings.

In a traditional economics class, we say that MPC can be between zero and one. What does that mean? For every dollar, you spend nothing or you spend all of it. That’s the conventional wisdom in an economics class. Unfortunately, in a personal finance class that MPC can be more than one. So what does that mean? You earn a $1.00, while you spend a $1.50, $1.20, $1.30, even $1.01. Even if you spend a penny more than a dollar when you earn a dollar, where did you get it from? There are two situations. You get it from your savings (economics class). In personal finance class, we know where we get it from: borrowing. So that’s a problem. It’s very clear. If your salary is $10,000, then your maximum spending is $10,000. That’s not our lifestyle.

Perkins loans – a federally guaranteed loan that offers up to $4,000 per year and a fixed, low interest rate of 5%. This has a 10-year repayment plan.

PLUS loans – the acronym stands for the Parent Loan for Undergraduate Students. Like the name states, a student’s parents take out this guaranteed loan with a 8.5% fixed and capped interest rate.

Principal (loans) – the total amount of the loan borrowed or how much is left to repay

Qualifying payment – In the IBR program, a payment that counts toward loan forgiveness on remaining debt after 25-years. Congress is currently defining the specifications of a qualifying payment.

Stafford loans – federal loans provided through the Direct and FFEL loan program. The interest rate of repayment is capped at 6.8 percent. It can be subsidized or unsubsidized.

subsidized loans – the federal government pays the loan’s interest while the student is attending school and during a deferment.

unsubsidized loans -the borrower is responsible for paying the loan’s interest while attending school.