Debt Glossary

Navigating the process of student loans, loan consolidation and debt settlement can be tough, but what if you don’t understand the terminology to begin grasping the concepts?

Here is a comprehensive glossary of common terms you’ll find when reading about these processes on our website or any financial paperwork.

401(k): A type of employer-sponsored retirement account where employees may contribute a portion of their salary. Taxes are deferred until money is withdrawn. Certain programs match a percentage of employee contributions.

Adjusted Gross Family Income:  The sum of your family’s wages, salary, interest, dividends, etc., minus certain deductions from income as reported on federal income tax return.

Adverse credit history: Record that shows negative actions in a credit report like bankruptcies, delinquent accounts and foreclosures.

Accrued interest: This interest builds on itself until a debt is completely paid off. It is determined by the unpaid balance of the original loan.

Alimony: The court-ordered obligation to offer financial support following a separation or divorce.

Amortization: Reduction value of an asset determined by prorating its cost over a certain amount of time.

Annual fee: Charged once a year to cover administrative costs and ensure credit benefits on credit cards.

Annual Percentage Rate (APR): Amount shown as a percentage that represents yearly costs of borrowing over the term of the loan or credit card.

Arbitration: Debt resolution using an impartial third party.

Asset: An item of ownership that has exchange value.

Balance: Amount available in an account. In terms of debt, the amount owed, not including payments already made.

Bankruptcy: A legal procedure where the debtor’s assets are liquidated by the court to account for financial obligations. Although the debtor is able to start over, the negative action remains on the credit report for seven to 10 years.

Better Business Bureau: A private, nonprofit organization that promotes ethical marketplace practices and offers resources to both businesses and consumers.

Broker: The person who negotiates transactions between buyers and sellers for real estate.

Capitalization: Adding unpaid interest to the original amount borrowed.

Chapter 7 bankruptcy: The more common type of bankruptcy that allows debtors to liquidate debts.

Chapter 13 bankruptcy: Debts are reorganized and debtors can keep property.

Closed-end credit: Loan or credit line where the amount borrowed is dispersed when the loan closes. A set date is given for when the loan interest and charges must be paid.

Collateral: Property or assets a borrower pledges to secure repayment of a loan. Collateral may be seized if the borrower fails to repay the loan.

Consolidation: Combining monthly payments into one payment, often through a consolidation loan.

Consumer debt: Money owed by consumers, rather than businesses or the government.

Consumer Financial Protection Bureau:  Independent federal organization created in 2011 that regulates consumer protection in regards to financial products and services.

Credit history: Record showing consumer’s borrowing and repaid debt.

Credit repair: Process of improving your credit score through actions like negotiating with creditors and disputing errors on your report.

Credit score: Number assigned by the credit bureaus that shows a consumer’s likelihood to pay back a debt. Lenders use these scores to determine risk of lending that person money.

Creditors: Person or organization that lends money to consumers or businesses.

Creditworthiness: A potential borrower’s ability to pay back credit.

Deduction: An amount that is subtracted, usually from gross income to reduce income subject to taxes.

Debt: Money owed by a borrower.

Debt-to-income ratio (DTI): Measure that compares personal debt payments to personal income. A high ratio means borrower faces a greater burden repaying debts and difficulty accessing other financing options.

Debt consolidation: The combination of multiple debts into a single debt with one interest rate.

Debt Management Plan: A credit counselor negotiates interest rates with creditors to make an individually tailored plan to reduce the borrower’s unsecured debts over a certain period of time.

Debt settlement: Process of negotiating with one or more creditors to reduce the balances owed by debtors. It’s also known as debt resolution.

Debt specialist: Trained professionals who mediate with creditors to resolve contractual obligations.

Deed: A written legal document showing transference and ownership of property. It includes the price, description of property and the signatures of involved parties.

Default: The status of a loan that is not repaid according to the terms of the promissory note. Federal student loans enter default status if payment hasn’t been made in more than 270 days.

Deferment: Period of time when loan payments (including principal and interest) are temporarily delayed.

Delinquency: Loan or account status when a borrower misses payments as specified by the repayment period in the loan agreement.

Dependent: Individual, usually a qualifying child, claimed by a taxpayer for credits or exemptions.

Direct loans: A batch of loans, including Stafford, Plus and consolidation loans, supported by the William D. Ford Federal Direct Loan Program that allows students and parents to borrow directly from the U.S. Department of Education.

Disbursement: Loan funds paid out to borrower.

Discretionary income: Amount of individual’s income left for spending, investing or saving after taxes and essential goods like food, housing and clothing are paid. It also includes funds spent on luxury items and other non-essential goods.

Earned Income Credit (EIC): This is a refundable income tax credit that assists low to moderate income working individuals and families.

Equifax: One of the three credit bureaus.

Equity: Various meanings, but in terms of finances, it’s ownership in an asset after debts related to that asset are paid off.

Experian: One of the three major credit bureaus.

Escrow: Financial instruments such as a property deed kept by a third party until a specific condition defined by the documents is fulfilled.

Free Application for Federal Student Aid (FAFSA): A form to determine the type of federal student aid for which students are eligible.

Fair Credit Reporting Act (FCRA): Federal law that promotes accuracy, fairness and privacy, and enables customers to view their own credit reports and dispute errors.

Fair Debt Collection Practices Act (FDCPA): Federal consumer protection law that prevents abusive debt collection practices.

Fair Market Value (FMV): Price an asset would garner if sold in the open market.

Federal Family Education Program (FFEL): Defunct higher education loans program funded through private partnerships administered at the state and local level.

Federal Trade Commission (FTC): Agency that protects consumer rights and enforces consumer protection laws.

FICO score: A type of credit score created by the Fair Isaac Corporation that ranges between 300 and 850.

Fixed-rate interest: Percentage will not change for the life of the loan.

Forbearance: A temporary postponement granted by the lender when borrower cannot make payments because of financial hardship. Interest accrues and is added to the overall amount owed.

Foreclosure: Lender legally takes possession of a mortgaged property when borrower is unable to make payments or meet obligations.

Fraud: Attempting to use deception for financial gain.

Garnishment: Act of employer withholding part of an employee’s wage to pay it to a creditor.

Grace period: Period of time between graduation or leaving full-time college enrollment and making the first payment on a student loan.

Health Savings Account (HSA): Medical savings account with tax benefits for people who participate in a high-deductible health plan.

Home Affordable Modification Program (HAMP): A federal program created in 2009 that assists eligible homeowners to modify the loans on their home mortgage.

Home equity: The difference between the market value of a home and the outstanding mortgage balance.

Home Equity Line of Credit (HELOC): A type of secondary financing that consists of a revolving line of credit.

Home equity loan: Secondary financing secured by equity in the borrower’s home.

Interest rate: The cost of borrowing money, usually expressed as a percentage.

Internal Revenue Services (IRS): Federal government agency responsible for tax regulation.

Individual Retirement Account (IRA): Allows taxpayers to direct pre-tax income into a retirement account. Distributions are treated as normal income and are subject to income taxes.

Lease: A legal contract signifying rental of goods or property.

Lender: Entity that makes funds available for borrowing.

Liability: Obligation for repaying a loan in addition to charges and interest.

Lien: A lender or creditor’s right to secure a debt against the property of a borrower.  If obligations are not met, property may be sold.

Liquidation: Converting assets into cash, typically to settle debts with creditors.

Loan forgiveness: Writing off all or part of a federal student loan balance when borrower meets certain criteria like a career in an eligible field such as teaching, law enforcement and others.

Loan term: Agreed time period for loan repayment.

Master Promissory Note: Signed legal document that holds terms and conditions of a loan.

Mortgage: A type of loan to purchase commercial or residential property.

Open-end credit: Pre-approved loans made on a continuous basis, rather than at one time. It is also known as revolving credit.

Paid in full: A status on a credit report that shows debts as paid, rather than reduced or settled.

Personal loan: A type of unsecured loan, meaning not tied to any property, for personal use and typically based on creditworthiness and other factors.

Pension: A fixed sum paid at regular intervals, typically following retirement.

Power of Attorney: Legal document that allows one person to make decisions, including financial ones, on behalf of another individual.

Prime rate: A low interest rate offered to the most creditworthy borrowers.

Principal: The amount borrowed, not including capitalized fees and interest.

Private sector:  A for-profit businesses owned by private individuals or groups, rather than the government.

Refinancing: Replacing an old loan with a new loan at a different interest rate by the same individual.

Repossession: Act of a creditor seizing property to make up for a borrower’s failure to pay on a loan.

Retirement: Stage of life after ceasing to work full-time.

Secured debt: Loan backed by collateral such as a car or property.

Short sale: Selling property or security when the recovered money is less than the amount owed.

Simple interest: Interest rate charged on the principal of a loan.

Social Security Administration: The tax-funded federal program which offers retirement benefits and other programs.

Subsidized loan: A type of need-based loan for which the government pays the interest while the borrower is in school and during the grace deferment periods.

Tax lien: If taxes are unpaid for a period of time, a lender may claim the borrower’s property equal to the delinquent taxes.

Term: Period of time between the initial procurement of the loan and the time the loan is to be paid back in full.

Transaction: An exchange of goods and services.

TransUnion: One of the three major credit bureaus.

Unsubsidized loan: A type of loan for which the government doesn’t pay the interest. Borrower is responsible for interest at the moment funds are disbursed.

Variable rate: Interest rates that are periodically reset.

Veteran: In financial aid terms, it’s a former member of the U.S. armed forces who served on active duty and was not dishonorably discharged.

W-2 form: Employers issue this IRS form that lists an employee’s wages and tax withheld.

Walter Pacheco

Walter started his nearly 20-year journalism career writing about South Florida's gourmet cuisine and shooting the region's best chefs and their gastronomic creations. He covered municipal politics and redevelopment at the Miami Herald for several years before moving to Orlando, where he helped launch the Orlando Sentinel's first Spanish-language publication, El Sentinel. Several years later, he helped develop the Orlando Sentinel's early breaking news team. He covered Central Florida hottest crime news, including controversial stories like the Casey Anthony murder case and the George Zimmerman story on the shooting death of Trayvon Martin. Walter also wrote about the region's technology and social media industry. He is now the managing editor for, providing online readers a community with news about student loans, debt settlements and loan consolidation.

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