# Glossary

#### Accrue

To accumulate over time.

For loans, interest is said to accrue when the borrower is being charged interest during a given period of time. For most graduate student loans, interest accrues during the entire tenor or duration of the loan.

It is important to ask if interest rates change (or accrue at a different rate) once repayment begins.

Note: CommonBond student loans accrue at 5.59% while student is in school and can be reduced to 5.34% with Auto Pay signup after repayment begins.

#### Annual Percentage Rate (APR)

The effective interest rate for a loan taking into account fees and other charges assumed to be incurred over the life of the loan.

Sometimes interest rates are quoted based only on the stated interest rate and do not include the effects of compounding interest (if applicable), capitalized interest, or origination fees. Looking instead at APR allows you to compare rates for different loan products on an apples-to-apples basis.

#### Automated Clearing House (ACH)

A network that allows for automatic transfers of money.

This is useful for you so you can set up automatic monthly payments to pay off your student loans on the Internet. ACH is used for various payments such as:

• Utility bills
• Loans
• Taxes

Note: CommonBond allows students to lower their interest rate from 5.59% to 5.34% once repayment begins if done with ACH withdrawals. It is standard for lenders to lower interest rates by 25 basis points for borrowers electing to use ACH because it ensures higher likelihood of repayment.

#### Basis Points (bps)

One hundredth of a percentage point: 1% = 100bps

In the lending world, a basis point (also known as a "bp") is the standard unit of measurement. One basis point = 0.01%. It is comparable to using centimeters to reference one one-hundredth of a meter when you are measuring a small object.

For example: The interest rate on a loan through CommonBond can be reduced by 25 basis points, or 0.25%, if a borrower elects for Auto Pay. Another use of basis point notation is in quoting floating rate loan quotes. For example: L+50 stands for Libor + 50 basis points. So for example if Libor is 1%, L+50 would indicate a rate of 1.5%.

#### Capitalizing Interest

Adding accrued, unpaid interest to the loan principal such that going forward, this new, larger amount represents the principal to be repaid.

It is common for student loan interest to capitalize after "in-school" deferment. For example, let's assume a current graduate student borrows \$10,000 at 5.59% and enters loan repayment exactly one year later. While the student is in school, the loan payments can be deferred, but the interest still accrues. When the repayment period begins one year later, \$559 of interest would have accrued. This amount is "capitalized," or added, to the original \$10,000 principal, and the student's outstanding loan balance becomes \$10,559.

#### Consolidation

Combining multiple loans into one.

Students who have borrowed different loan products to finance their education can consolidate – or merge the individual loans into a single loan. The resulting interest rate and maturity is typically a weighted average (meaning the largest loans will have the greatest impact on the resulting single interest rate) Student loan consolidation usually does not involve a fee. A borrower will consolidate several loans into one to make the repayment process simpler.

A consolidation is different from a refinancing. When a borrower refinances his or her existing student loans, the existing lenders are paid off in full and the terms of the individual loans are replaced by new terms offered by the new lender. Recent MBA graduates of schools in the growing CommonBond community can refinance their graduate student loans with the MBA Refinance Loan, offered through the CommonBond loan program.

#### Cosigner

Someone who agrees to pay your debt if you default on your loan.

If a loan applicant has a limited poor credit history, he or she might be required to have someone else co-sign the loan in order to be approved.
Note: CommonBond does not generally require a cosigner, however if someone does not meet the minimum underwriting standards, he or she could be given the opportunity to have a cosigner in order to still be eligible for CommonBond funding.

#### Cost of Attendance (COA)

...and no, this is not the same as tuition.

The Cost of Attendance is the official university-published amount it costs to attend school for one specific academic year. This includes tuition but also includes other indirect educational expenses such as books, fees, housing, transportation etc.

The cost of attendance varies by school and it is important to look up your school's cost of attendance, as it will dictate the amount you are eligible to borrow in student loans. Note: Commonbond allows students to borrow up to the cost of attendance minus other sources of financial aid such as scholarships.

The cost of attendance also varies each year, usually increasing about 5% year to year. Keep this in mind when budgeting your two-year MBA!

#### Default

A borrower will default on a loan after being delinquent or not making scheduled payment(s) for an extended period of time.

Default usually occurs after 150 days of delinquency. At this point you probably will be getting phone calls and flooded with mail from a collection agency.

#### Deferment

A period of time during which you do not make repayments on your loan.

Deferment is an option for the borrower and can be exercised with no harm to the borrower's credit score. This can include deferring payment of both the principal and any accrued interest. That being said, interest can continue to accrue during a deferment period. For a student loan, payments can usually be deferred until graduation, which is termed "In-School Deferment".

#### Delinquent/Delinquency

Failure to make scheduled payment(s).

Delinquency can negatively affect one's credit score and therefore is something to take very seriously. It can also affect your ability to take out loans in the future. A loan that is delinquent for 150 days through the CommonBond loan program would be considered in default.

#### Direct PLUS

A student loan from the federal government available to graduate or professional students and parents. The maximum a student can borrow is the school's cost of attendance minus other financial aid sources you are already using such as scholarships or the Stafford loan. The Direct PLUS loan has a rate of 6.84% and 4.292% origination fee.

Since the rate is higher than that of the Stafford loan, some students borrow with the Direct PLUS to meet the rest of their financial need after they have maxed out the Stafford loan or other funding sources. Student must fill out FAFSA.

"Direct"Â stands for borrowing directly from the Department of Education and PLUS originally stood for "Parent Loan for Undergraduate Students", however now the Direct PLUS loan also includes loans for graduate students, not just parents.

#### Disbursement

The distribution of loan funds.

In the case of student loans, the funds from a loan disbursement go directly to the school. There are typically two loan disbursements – one at the beginning of each semester. Note: Funds from a student loan through the CommonBond program are sent directly to the school. Most student lenders, including the federal government, follow a similar process. Excess funds that exceed tuition are sent to the student for use towards other indirect educational expenses, such as housing and books.

For CommonBond MBA Refinance Loan borrowers, funds are sent directly to the original lender(s) and student begins payment through the CommonBond servicer, Cology.

#### FICO Score

Type of credit score that is used to determine credit-worthiness of borrowers, or their ability to pay back a loan.

FICO was created by the Fair Isaac Corporation, hence the term FICO score. FICO scores are between 300 and 850. A score of 620 is a common benchmark under which it is harder to get a good rate on a loan, including student loans. Check your FICO score on: http://www.myfico.com

#### Fixed vs. Floating Rate

An interest rate is fixed if it remains unchanged over time, while a floating interest rate changes over time based on changes in a market benchmark rate, such as LIBOR or the prime rate. The two most common floating rate benchmarks are 1) LIBOR and 2) the prime rate, both of which represent rates at which major financial institutions can borrow money. The interest rate for a floating rate loan is typically based off of a calculation that adds a percentage spread to one of these two floating rate benchmarks. For example, let's assume the rate for a loan is quoted at LIBOR + 2.00%. If current LIBOR rates are 1.00%, your effective loan rate would be 3.00%. If LIBOR increases, so would your rate, and vice versa. Some floating rate loans have a cap – a rate above which the floating interest rate cannot exceed. A cap is included to protect borrowers from excessively high interest rate environments.

#### Forbearance

The temporary delay of loan repayment due to economic hardship.

Lenders can grant forbearance when a borrower is not eligible for or has exhausted deferment options and still cannot make payments as scheduled. Some reasons to request forbearance can include financial hardship. This can involve temporarily reducing or postponing payments.

#### Free Application for Federal Student Aid (FAFSA)

Form that students fill out that determines eligibility for federal student aid of various federal programs.

The FAFSA is a form required to fill out for federal student loans such as the Stafford loan and Direct PLUS. See http://www.fafsa.ed.gov/. It can be filled out starting January 1st for the coming academic year. If a student is requesting funding for a consecutive year, they can submit a renewal FAFSA.

#### Grace period

Additional time granted before borrower has to make payments.

Typically, the grace period for a student loan is the six-month period after graduation. Interest still accrues during the grace period; however, the borrower is not required to make any loan payments.

#### Income-based repayment (IBR)

An alternative repayment option offered by the federal government, in which a borrower's monthly payments are based on his or her specific income level and family size (number of dependents). Income-based repayment can serve to reduce monthly payments in the event of financial hardship.

It is important to understand that in addition to reducing monthly payments, opting for an income-based repayment plan can also extend the time required to fully repay a student loan and may result in a higher amount of interest paid over the life of the loan. The U.S. government IBR plan also provides relief to borrowers who pursue a career in public service: after ten years of making consistent monthly payments any remaining loan balance is forgiven.

There are also Income-Contingent repayment plans offered by the federal government which, along with financial hardship and income, also consider how much total debt is outstanding.

#### Interest Only (IO)

Making monthly payments while in school based only on the interest that has accrued during that month (as opposed to a payment consisting of interest and a portion of principal).

Some students (particularly those with adequate savings) may opt for an interest-only repayment plan while in school. By pushing off repayment of principal you are indeed extending the lifetime of your loan. So why would you do this?

One reason for electing interest only repayments in school would be if you have access to an income flow while in school. If you can pay for the accruing interest right away, you will not have a large sum capitalize on graduation day.

#### Interest Rate

The cost of borrowing funds. The amount charged for borrowing money that the borrower must pay in addition to paying back the amount borrowed. Usually expressed as a percent of total borrowed.

Interest rates are set by the lender and usually expressed as a percentage per year. Rates vary based on various factors such as time until repayment, likelihood of full repayment, purpose for borrowing and if there is a tangible asset to back the loan such as a house.

#### LIBOR (London Interbank Offered Rate)

The estimated rate at which large international banks of high credit rating would be charged for borrowing from other banks.

It is thus the benchmark or reference point for global interest rates.

The leaders of some of the most powerful banks in the British Banker Association (BBA) estimate what they would be charged to borrow money for different amounts of time: overnight, 3 month, yearly etc. The BBA takes the average of these estimates for each maturity and posts them at 11am EST each business day. This produces several benchmark rates that are used to drive other rates around the world.

Interest rates can then be quoted at 3-month LIBOR, plus an additional percentage spread, because LIBOR is what the big banks can borrow at, so LIBOR "plus something" will be what you can borrow at. The "plus something" will be based on your ability to pay back a loan. It's also what you are shopping for if you look at private floating rate student loan options.

#### Loan

Funds, in the form of debt, that a borrower takes now and agrees to pay back later, over an agreed upon period of time at an agreed upon price (i.e., interest rate), to a lender.

There are various purposes for loans, various types of lenders and also several details or agreement terms of the loans themselves. Examples:

• Purposes: Student, auto, home
• Lenders: Banks, credit unions, government, family members
• Terms: tenor (duration), rate (interest rate), principal (amount borrowed), fees

#### Origination Fee

A one-time cost in addition to the interest rate for borrowing, usually expressed as a percentage of the loan amount.

The origination fee is typically added, or capitalized on top of the original loan amount and paid over the life of the loan. Take an example of a 2% origination fee and \$50,000 loan. At disbursement, the loan principal would increase from \$50,000 by an additional 2% or \$1,000 to a total of \$51,000. And it's on this new balance that you would pay your interest rate over time during repayment.

When comparing a lower-rate loan that carries an origination fee compared to a higher-rate loan with little to no fee, it is helpful to look at the APR.

#### Origination/Originator

The process of applying for and creating a loan. The originator is the bank or financial service organization which offers/creates the loan.

Note: CommonBond partners with Bank of Lake Mills, which is the originator of the loan.

#### Pre-payments

Paying more than the monthly amount you are scheduled to pay back. Effectively, prepayment is repaying principal ahead of schedule.

Prepayment allows the borrower to pay off the loan quicker expected. Thus, less interest will accrue and the borrower will end up paying less money over the life of the loan. That said, there can be a fee associated with prepayment so make sure to check with your lender.

Note: CommonBond does not charge a fee for prepayment.

#### Prime Rate

A country's reference or benchmark interest rate. In the U.S.: Prime Rate = Federal Funds Rate + 3%

The Federal Funds Rate is the rate big banks charge to each other in the U.S. to borrow money overnight.

Thus the Prime rate, which at one point represented what banks charged top credited investors, is now simply pegged against the fed funds rate. It is also used as an alternative to LIBOR for some floating-rate student loans.

#### Principal

The amount borrowed one which interest accrues. Or in other words, the face value of the loan.

The principal amount is key because it is the amount the interest rate is multiplied by to determine how much interest is owed. The principal for student loans is the amount you borrow plus any initial origination fee. For example, if you borrow \$50,000 with a fee of 2%, your principal is \$51,000 (\$50,000+\$1,000).

#### Private Loan

Loans provided by financial institutions other than the federal government.

Examples would be from banks, credit unions, or other lenders. These are also called Alternative loans. It is important to keep in mind that private loans are often based on credit worthiness of borrowers, and often have variable rates.

#### Promissory Note

A written legal document with the agreement details of the loan.

This is the legal document you will sign when you receive a student loan. It will contain all the details of the loan agreement and be signed by the borrower and lender.

#### Public Service Loan Forgiveness (PSLF)

Loan forgiveness on federal loans upon working in a public service job.

#### Refinance

To replace or restructure existing loans.

Some reasons for refinancing include:

Note: CommonBond allows students to refinance their existing student loans in order to lower their interest rates. Commonbond refinances private or federal loans used for purposes of receiving an MBA.

#### Repayment

The period during which a borrower pays back the money owed from a loan.

Repayment usually involves consistent monthly payments for a set period of time. For example, monthly loan payments of \$100 for 10 years. Pre-payment, or paying more than the required monthly payments, can involve a penalty. CommonBond does not have a penalty for pre-payment. Most lenders also have a hierarchy in which a borrower would pay back in the following order:

1. Any additional fee or other charge
2. Interest
3. Principal

#### Sallie Mae (SLM Corporation)

Publicly traded student financial services company that provides private student loans.

Sallie Mae is the common name used for SLM Corporation, or Student Loan Marketing Association. Sallie Mae was originally a government agency with loans backed by the US government. In 2004 Sallie Mae was privatized, meaning it was no longer directly associated with the U.S. government and had shareholders just like any publicly traded company.

#### Scholarship

A gift to help pay for education that the student does not have to pay back.

Scholarships are available from various sources including:

• Foundations
• Universities (can be either merit- or need-based)

#### Servicing/Servicer

The collection and handling of loan payments. The servicer is the financial service organization in direct contact with the borrower to collect repayments.

The servicer can, but does not have to, be the same financial service organization as the originator of the loan.

Note: CommonBond uses Cology for repayment servicing.

#### Stafford Loan

A student loan from the federal government available to eligible students for a maximum loan size of \$20,500 annually. The Stafford loan has a rate of 5.84% and 1.073% origination fee.

The Stafford loan is available via the Federal Direct Student Loan Program (FDSLP) where the loan is received directly from the Department of Education.

It also has stricter eligibility requirements. Students must fill out a FAFSA.

#### Subsidized vs. Unsubsidized Federal loan

For a subsidized loan, interest does NOT accrue during the time student is enrolled in school (deferment). The federal government covers the interest due for a subsidized loan during this time. As of July 2012, all graduate school federal loans are unsubsidized so interest does accrue while borrowers are in in-school deferment.

#### Tenor

Length of a loan or remaining amount of time until repayment is complete.

Most student loans include a repayment period with a tenor of 10 years. That being said, students can choose to make pre-payments in order to pay off the loan earlier than the scheduled repayment tenor.

#### Terms

Details of the loan.

Example loan terms include:

• Tenor (duration)
• Rate (interest rate)
• Principal (amount borrowed)
• Origination Fees
• Maximum/minimum amount borrowed

#### Tuition

Cost of taking classes or cost of learning.

While tuition represents the cost of taking classes, the full cost of education considers non-tuition expenses such as books, housing etc., which sum to a program's Cost of Attendance, a school-specific figure estimated by the university.

#### Underwriter/Underwriting

The process of creating the loan. The underwriter approves a borrower after considering various credit criteria.