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Financial Literacy

Financial Literacy is a growing topic, especially among college students.  Oakland University promotes healthy financial practices by offering financial literacy information to students.  Learn more about Financial Literacy by exploring the Project on Student Debt website and the Financial Literacy guidebook from the Federal Department of Education.. 
UNDERSTANDING
CREDIT
GLOSSARY
OF TERMS

Credit History 

An individual's credit history is a list of transactions on a credit report. Just like high school transcripts indicate to a university how academically successful a student might be in college, a credit report shows lenders, landlords, employers, and retailers, how financially successful you have been in the past in terms of repaying your debts. The three most popular credit reports are compiled by Experience, Equifax, and TransUnion. You can obtain a free copy of your credit report once per year at AnnualCreditReport.com. It is important to check your credit history for discrepancies and issues of identity theft.  

Understanding Your Credit Score

Also known as a credit score, your FICO score can range from 300-850; the higher the score, the better, as a higher score indicates a stronger measure of creditworthiness. Individuals can achieve a high credit score by maintaining a long history of paying bills on time each month and maintaining a low amount of debt. FICO scores are used to determine whether or not an individual is eligible to be approved for a loan, in determining an interest rate, and goods and services such as a cell phone.  Download the Credit Score PDF

Credit inquiries can impact an individual's credit score.  Inquiries known as "soft hits" do not affect the credit score.  Soft hits include inquiries made by an individual, such as requesting your own credit score; inquiries made by insurance companies and employers are also considered soft hits.  Inquiries known as "hard hits" may affect the credit score.  Hard hits include inquiries by lenders, such as credit card companies or banks, inquiries made by apartment complexes, and inquiries by retail establishments.   

Improving Your Credit Score

Credit scores are calculated by using information regarding the individual's past history, amount owned, length of credit history, types of credit in use, and new credit.  The chart below demonstrates harmful factors to credit scores and ways to improve.

Credit Score Component  Harmful Factors  Ways to Improve 
35%
Past History
Late Payments.
It takes about 24 months to restore damaged credit from just one late payment.
Pay on Time.
Late payments are the most common piece of negative information on reports.
30%
Amount Owed 
No Availability.
Cards with balances at their maximum credit limits lower your score.
Pay Down Debts.
Bring delinquent loans current.
15%
Length of Credit History 
Closing Revolving Accounts.
This reduces the history of your accounts and lowers available credit limits.
Don't Close Accounts.
Pay down or pay off credit cards, but don't close them.  A closed account will still show up on your credit report.
10% 
Types of Credit in Use 
Too Many Revolving Accounts.
Revolving credit (credit cards) reflects more negatively than installment loans (auto loans, mortgage).
Revolving Credit.
Move revolving debt (line-of-credit accounts) to installment debt (closed-end loan accounts)
10% 
New Credit 
Opening Multiple Cards.
Multiple new accounts in a short period of time reflects negatively on your credit score.
Avoid Multiple Cards.
Don't open multiple new lines of credit in a short period of time.


Student Loans and Credit Scores

Student loans can serve to improve credit scores.  Student loans are treated as installment payments, so when monthly payments are made in full, and on time, the credit report reflects that payment on a continuing 30-day basis, and communicates to future lenders the individual can be trusted to handle money responsibly.  

Conversely, defaulting on a loan, or failing to make an on time, full payment, can damage a credit score, which can affect an individual's ability to gain employment, housing, and loans.  If a borrower is unable to make a monthly payment, he or she should contact the lender to request a forbearance.  

A forbearance is granted by a lender in certain circumstances and puts loan repayment on hold.  Borrowers should note, however, even when a forbearance is in place, interest continues to accrue and borrowers may be required to make payments for the interest only.  Students enrolled and attending classes at least half-time are deferred from making payments to their loan principles are interest, although interest continues to accrue for most loans. Individuals granted a forbearance or in deferment will not harm their credit scores, so it is important to remain in contact, not avoid, lenders when a graduate is struggling to make payments.  Borrowers can view their loan history on the National Student Loan Database System (NSLDS). 



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Understanding financial aid and related topics is important for students in all stages of education.  New students must understand the different types of aid and the language used to describe various parts of the financial aid process, awards, and requirements.  If students borrow loans, they must prepare to repay the loans after graduation, which requires budgeting skills, as well as an understanding of the repayment process.  Below is a glossary of the most commonly used terms related to financial aid.  For a more extensive list, visit the Federal Department of Education glossary.

Academic Year
The measure of academic work accomplished each year by students attending postsecondary educational institutions as defined by the school. OU's academic year consists of 30 weeks of instructional time in which full-time students are expected to complete at least 24 semester hours. 

Accrued Interest
Interest that accumulates and is paid in installments at a later date (usually when the principal becomes due) rather than on a regular schedule from the time a loan is disbursed and interest begins. Accrued interest may be compound (interest computed on the sum of the original principal and accrued interest) or simple (interest computed on the original loan principal only). 

Adjusted Gross Income (AGI)
An individual's total income (wages, salaries, interest, dividends, etc.) as indicated on his or her income tax return after all allowable deductions are subtracted.

Aggregate Loan Limit
Also known as "cumulative loan limit." This is the maximum Federal Direct Stafford Loan amount, subsidized and unsubsidized, that students attending postsecondary educational institutions may borrow throughout their educational careers.

Assets
The property value and debt that must be reported on the Free Application for Federal Student Aid (FAFSA). This includes financial holdings such as cash on hand, in checking and savings accounts, trust funds, stocks, bonds, other securities, real estate (excluding the family home), income-producing property, business equipment and business inventory.

Award
Financial assistance offered students to help reduce the cost of their postsecondary education. Types of awards include scholarships, grants, loans and work programs that are funded by federal, state and private sources. The combination of all awards is often referred to as the financial aid award package.

Award Notification
The report that notifies financial aid applicants of the financial assistance being offered. The award notification and accompanying instructional materials provide information on the types and amounts of aid being offered, specific loan programs, and student responsibilities and conditions that govern the awards. Students who apply for financial aid at Oakland University must be admitted before an award notification can be produced.

Award Package
The combination of all the financial aid awards (scholarships, grants, loans and work programs that are funded by institutional, federal, state and private sources) offered a student to help reduce postsecondary educational costs. Also see "Award."

Borrower
An individual who agrees to take on the obligation of repaying a loan and accepts the terms of the loan by signing a promissory note. Students are borrowers of Federal Direct Stafford Loans, subsidized and unsubsidized, and parents of legally dependent undergraduate students are the borrowers of Federal Direct Parent Loans (PLUS). 

Budget
See "Cost of Attendance."

Capitalization (of Loan Interest)
The process of deferring interest payments as they come due and adding the accrued interest to the principal amount of the loan. Although capitalizing is a way to postpone interest payments, it adds to the amount of the principal and, consequently, increases both the interest (based on the higher principal) and the overall amount that eventually must be repaid.

Cost of Attendance (COA)
Also known as "cost of education" or "budget." This is the average cost of a student's postsecondary education in a particular enrollment period, usually one academic year, which is based on course of study, grade level, residency and other factors. The cost of attendance includes the average cost for tuition as well as allowances for room and board (on or off campus), books and supplies, and miscellaneous personal expenses. It also may include other elements such as transportation, dependent care and study abroad program expenses. The figure is used to determine a student's eligibility for financial assistance. 

Credit Worthiness
The ability to borrow money.  The better one's creditworthiness, the more likely it is the individual will be able to receive a loan or a line of credit from a financial institution or other company.  Individual credit worthiness is measured by the FICO score, or personal credit score.

Default
The failure of a borrower to repay a loan according to the terms agreed to in the promissory note. Usually default is established once loan payments are more than 180 days past due. Defaults are recorded on a borrower's permanent credit record and can result in serious legal consequences.

Deferment 
A limited and specified period of time that a borrower of a federal educational loan is not required to make regular monthly payments. Interest payments may or may not be postponed depending on the type of loan. To qualify for deferment, the borrower must meet at least one of the requirements established by law. Deferment is not automatic, and the appropriate loan agency must be contacted for more information.

Delinquent 
The failure of a borrower to make a loan payment by the due date. Delinquencies greater than 30 days are reported to national credit bureaus.

Disbursement
The process which financial aid and loan funds are applied toward a student's postsecondary education and related living expenses. Any credit balance in excess of charges is refunded to the student to be used for other educational expenses.

Expected Family Contribution (EFC)
Also known as "family contribution." This is the dollar amount the federal government expects a student (and parents, if dependent, or spouse, if married) to contribute toward postsecondary educational expenses for one academic year. This is computed using a formula based on the income and asset information reported on the Free Application for Federal Student Aid (FAFSA). This dollar amount is made up of two components: the parent contribution (if the student is dependent) and the student contribution. The EFC is used by schools to determine the type of financial assistance for which a student is eligible. 

FAFSA
See "Free Application for Federal Student Aid." 

Financial Aid
The general term that describes the financial assistance offered to students to help reduce the cost of their postsecondary education. It is meant to supplement what the student (and parents, if dependent, or spouse, if married) is expected to contribute toward educational expenses. Financial aid programs include scholarships, grants, loans and work programs that are funded by federal, state and private sources. 

Financial Need
The difference between the cost of a student's postsecondary education and the dollar amount the federal government determines from data reported on the Free Application for Federal Student Aid (FAFSA) that a student (and parents, if dependent, or spouse, if married) can contribute toward that cost. Eligibility for need-based financial aid programs is determined using the resulting figure. 

Free Application for Federal Student Aid (FAFSA)
The standard federal form students attending postsecondary educational institutions must complete each academic year to be considered for financial aid. This form collects income and asset data to determine the family contribution figure. Once an applicant submits the FAFSA to the federal government's processing center, data is prepared for release to the schools and state agencies listed on the application. Those schools and agencies then determine the student's financial aid eligibility. Students might be permitted to file the Renewal FAFSA if a FAFSA was filed the previous academic year. The renewal form contains preprinted data with responses from the prior year as well as other items that must be updated with current information. If a student qualifies to use the Renewal FAFSA, the federal government will notify the student by mail in December or January for the following academic year. 

Grant
Funding for postsecondary education, usually awarded on the basis of need, that does not require repayment or a work obligation. Federal Title IV grant programs include the Pell Grant, Supplemental Educational Opportunity Grant (SEOG), and Federal Work-Study Grant. 

Master Promissory Note (MPN)
A legally binding contract between the U.S. Department of Education and the borrower that contains the terms and conditions governing all the borrower's Federal Direct subsidized and unsubsidized loans, including repayment obligations. The master promissory note is valid for 10 years from the date it is originally signed. 

National Student Loan Database Service (NSLDS)
A federal government database with the federal Pell Grant and educational loan borrowing history for every student. Schools must add any mid-year transfer students to their monitoring list to receive changes in aid information that may impact aid eligibility for the current year. 

School Code
Also known as the "Title IV Code" or "Federal School Code." The U.S. Department of Education assigns this federal identification number to postsecondary educational institutions. OU's school code is 002307. 

Selective Service Certification
Documentation that must be collected to verify all male students, ages 18 through 25, are registered with Selective Service. Male students attending postsecondary educational institutions must register with Selective Service before receiving federal financial aid. 

Verification
The process the U.S. Department of Education uses to make sure information reported on the Free Application for Federal Student Aid (FAFSA) is accurate. Technical and administrative procedures are used by postsecondary educational institutions to detect and resolve inaccuracies in the data supplied on the FAFSA. Usually evaluation of tax and asset documentation is required. 


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