The following are common terms and their definitions in the world of financial aid.
Academic Year The time in which a full-time student should complete two semesters (24 hours), two trimesters, or three quarters at a college, university, technical or vocational school. Or it must be at least 36 quarter hours if a program is measured in credit hours.
Adjusted Gross Income (AGI) An interim calculation in the computation of income tax liability. It is computed by subtracting certain allowable adjustments from gross income.
Administrator A person appointed by the court to settle an estate when there is no will.
After-Tax Return The return from an investment after the effects of taxes have been taken into account.
Aggressive Growth Fund A mutual fund whose primary investment objective is substantial capital gains.
Alternative Minimum Tax A method of calculating income tax that disallows certain deductions, credits, and exclusions. This was intended to ensure that individuals, trusts, and estates that benefit from tax preferences do not escape all federal income tax liability. People must calculate their taxes both ways and pay the greater of the two.
Annuity An insurance-based contract that provides future payments at regular intervals in exchange for current premiums. Annuity contracts are usually purchased from banks, credit unions, brokerage firms, or insurance companies.
Asset An item of value, such as a family’s home, business, real estate, stocks, bonds, mutual funds, cash, certificates of deposit (CDs), bank accounts, trust funds and other property and investments.
Asset Class A category of investments with similar characteristics.
Asset Protection Allowance A portion of your parents’ assets that are not included in the calculation of the parent contribution, as calculated by the Federal Methodology need analysis formula. The asset protection allowance increases with the age of the parents.
Audit The examination of the accounting and financial documents of a firm by an objective professional. The audit is done to determine the records’ accuracy, consistency, and conformity to legal and accounting principles.
Award Year The year in which you will receive financial aid. It runs from July 1st through June 30th.
Balanced Mutual Fund A mutual fund whose objective is a balance of stocks and bonds. Such funds tend to be less volatile than stock-only funds.
Base Income Year The tax year prior to the academic year (award year) for which financial aid is requested. The base year for the freshman year of college runs from January 1 of the junior year in high school through December 31 of the senior year. Financial information from this year is used to determine eligibility for financial aid.
Bear Market When the stock market appears to be declining overall, it is said to be a bear market.
Beneficiary A person named in a life insurance policy, annuity, will, trust, or other agreement to receive a financial benefit upon the death of the owner. A beneficiary can be an individual, company, organization, and so on.
Blue Chip Stock The common stock of a company with a long history of profitability and consistent dividend payments.
Bond A bond is evidence of a debt in which the issuer promises to pay the bondholders a specified amount of interest and to repay the principal at maturity. Bonds are usually issued in multiples of $1,000.
Book Value The net value of a company’s assets, less its liabilities and the liquidation price of its preferred issues. The net asset value divided by the number of shares of common stock outstanding equals the book value per share, which may be higher or lower than the stock’s market value.
Bull Market When the stock market appears to be advancing overall, it is said to be a bull market.
Buy-Sell Agreement A buy-sell agreement is an arrangement between two or more parties that obligates one party to buy the business and another party to sell the business upon the death, disability, or retirement of one of the owners.
Capital Gain or Loss The difference between the sales price and the purchase price of a capital asset. When that difference is positive, the difference is referred to as a capital gain. When the difference is negative, it is a capital loss.
Cash Equivalents Short-term investments, such as U.S. Treasury securities, certificates of deposit, and money market fund shares, that can be readily converted into cash.
Cash Surrender Value The amount that an insurance policyholder is entitled to receive when he or she discontinues coverage. Policyholders are usually able to borrow against the surrender value of a policy from the insurance company. Loans that are not repaid will reduce the policy’s death benefit.
CERTIFIEDFINANCIALPLANNER Practitioner A credential granted by the Certified Financial Planner Board of Standards, Inc. (Denver, CO) to individuals who complete a comprehensive curriculum in financial planning and ethics. CFP, CERTIFIED FINANCIAL PLANNER and federally registered CFP (with flame logo)® are certification marks owned by the Certified Financial Planner Board of Standards. These marks are awarded to individuals who successfully complete the CFP Board’s initial and ongoing certification.
Certified Public Accountant (CPA) A professional license granted by a state board of accountancy to an individual who has passed the Uniform CPA Examination (administered by the American Institute of Certified Public Accountants) and has fulfilled that state’s educational and professional experience requirements for certification.
Charitable Lead Trust A trust established for the benefit of a charitable organization under which the charitable organization receives income from an asset for a set number of years or for the trustor’s lifetime. Upon the termination of the trust, the asset reverts to the trustor or to his or her designated heirs. This type of trust can reduce estate taxes and allows the trustor’s heirs to retain control of the assets.
Charitable Remainder Trust A trust established for the benefit of a charitable organization under which the trustor receives income from an asset for a set number of years or for the trustor’s lifetime. Upon the termination of the trust, the asset reverts to the charitable organization. The trustor receives a charitable contribution deduction in the year in which the trust is established, and the assets placed in the trust are exempt from capital gains tax.
Chartered Financial Consultant (ChFC) A professional financial planning designation granted by The American College (Bryn Mawr, PA) to individuals who complete a comprehensive curriculum in financial planning. Prerequisites include passing a series of written examinations, meeting specified experience requirements and maintaining ethical standards. The curriculum encompasses wealth accumulation, risk management, income taxation, planning for retirement needs, investments, estate and succession planning.
Chartered Life Underwriter (CLU) A professional designation granted by The American College to individuals who complete a comprehensive curriculum focused primarily on risk management. Prerequisites include passing a series of written examinations, meeting specified experience requirements, and maintaining ethical standards. The curriculum encompasses insurance and financial planning, income taxation, individual life insurance, life insurance law, estate and succession planning, and planning for business owners and professionals.
COBRA The Consolidated Omnibus Budget Reconciliation Act is a federal law requiring employers with more than 20 employees to offer terminated or retired employees the opportunity to continue their health insurance coverage for 18 months at the employee’s expense. Coverage may be extended to the employee’s dependents for 36 months in the case of divorce or death of the employee.
Coinsurance or Co-Payment The amount an insured person must pay for a covered medical and/or dental expense if his or her insurance doesn’t provide 100 percent coverage.
Commodities The generic term for goods such as grains, foodstuffs, livestock, oils, and metals which are traded on national exchanges. These exchanges deal in both “spot” trading (for current delivery) and “futures” trading (for delivery in future months).
Common Stock A unit of ownership in a corporation. Common stockholders participate in the corporation’s profits or losses by receiving dividends and by capital gains or losses in the stock’s share price.
Community Property State laws vary, but generally all property acquired during a marriage – excluding property one spouse receives from a will, inheritance, or gift – is considered community property, and each partner is entitled to one half. This includes debt accumulated. There are currently nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Compound Interest Interest that is computed on the principal and on the accrued interest. Compound interest may be computed continuously, daily, monthly, quarterly, semiannually, or annually.
Consumer Price Index The U.S. Department of Labor’s main indicator of inflation. The Consumer Price Index is calculated each month from the cost of some 400 retail items in urban areas throughout the United States.
Cost of Attendance (COA) The total amount it should cost the student to go to school, including tuition and fees, room and board, allowances for books and supplies, transportation, and personal and incidental expenses. Loan fees, if applicable, may also be included in the COA. Child care and expenses for disabilities may also be included at the discretion of the financial aid administrator. Schools establish different standard budget amounts for students living on-campus and off-campus, married and unmarried students and in-state and out-of-state students.
Custodial Parent If a student’s parents are divorced or separated, the custodial parent is the one with whom the student lived the most during the past 12 months. The student’s need analysis is based on financial information supplied by the custodial parent.
Deduction An amount that can be subtracted from gross income, from a gross estate, or from a gift, thereby lowering the amount on which tax is assessed.
Defined Benefit Plan A qualified retirement plan under which a retiring employee will receive a guaranteed retirement fund, usually payable in installments. Annual contributions may be made to the plan by the employer at the level needed to fund the benefit. The annual contributions are limited to a specified amount, indexed for inflation.
Defined Contribution Plan A retirement plan under which the annual contributions made by the employer or employee are generally stated as a fixed percentage of the employee’s compensation or company profits. The amount of retirement benefits is not guaranteed; rather, it depends upon the investment performance of the employee’s account.
Direct Lending The Direct Lending Program is another approach to delivering educational loans to eligible student borrowers. The terms and conditions governing Direct Loans are similar to the Federal Family Education Loan Program (FFELP) program. The difference is that the federal government lends funds to eligible borrowers through the school, eliminating the role of lenders and guaranty agencies. Students repay their loans directly to the federal government. Not every school participates in this program. Check with the financial aid officer at your institution. If a school is a direct lender, it will determine how a federal student loan is obtained.
Diversification Investing in different companies, industries, or asset classes. Diversification may also mean the participation of a large corporation in a wide range of business activities.
Dividend A pro rata portion of earnings distributed in cash by a corporation to its stockholders. In preferred stock, dividends are usually fixed; with common shares, dividends may vary with the fortunes of the company.
Dollar Cost Averaging A system of investing in which the investor buys a fixed dollar amount of securities at regular intervals. The investor thus buys more shares when the price is low and fewer shares when it rises, and the average cost per share is lower than the average price per share. This strategy does not protect against loss in declining markets and involves continuous investments, regardless of fluctuating price levels.
Efficient Frontier A statistical result from the analysis of the risk and return for a given set of assets that indicates the balance of assets that may, under certain assumptions, achieve the best return for a given level of risk.
Employer-Sponsored Retirement Plan A tax-favored retirement plan that is sponsored by an employer. Among the more common employer-sponsored retirement plans are 401(k) plans, 403(b) plans, simplified employee pension plans, and profit-sharing plans.
Enrollment Status An indication of whether you are a full-time or part-time student. Generally you must be enrolled at least half-time (and in some cases full-time) to qualify for financial aid.
Equity The value of a person’s ownership in real property or securities; the market value of a property or business, less all claims and liens upon it.
ERISA The Employee Retirement Income Security Act is a federal law covering all aspects of employee retirement plans. If employers provide plans, they must be adequately funded and provide for vesting, survivor’s rights, and disclosures.
ESOP(employee stock ownership plan) A defined contribution retirement plan in which company contributions must be invested primarily in qualifying employer securities.
Estate Conservation Activities coordinated to provide for the orderly and cost-effective distribution of an individual’s assets at the time of his or her death. Estate conservation often includes wills and trusts.
Estate Tax Upon the death of a decedent, federal and state governments impose taxes on the value of the estate left to others (with limitations).
Executive Bonus Plan The employer pays for a benefit that is owned by the executive. The bonus could take the form of cash, automobiles, life insurance, or other items of value to the executive.
Executor A person named by the probate courts or the will to carry out the directions and requests of the decedent.
Expected Family Contribution (EFC) The amount of money that the family is expected to be able to contribute to the student’s education, as determined by the Federal Methodology need analysis formula approved by Congress. The EFC includes the parent contribution and the student contribution, and depends on the student’s dependency status, family size, number of family members in school, taxable and nontaxable income and assets.
Federal Aid Student financial aid programs sponsored by the U.S. Department of Education which include Federal Pell Grants , Federal Supplemental Educational Opportunity Grants (SEOG), Federal Work-Study (FWS), Federal Perkins Loans, Federal Stafford Loans, and Federal PLUS loans.
Federal Methodology The need analysis formula used to determine the EFC. The Federal Methodology takes family size, the number of family members in college, taxable and nontaxable income and assets into account. Unlike most Institutional Methodologies, however, the Federal Methodology does not consider the net value of the family residence.
Federal Family Education Loan Programs The Federal Family Education Loan Program (FFELP) was formerly known as the Guaranteed Student Loan (GSL) Program. The FFELP program includes the Federal Stafford Loans (subsidized and unsubsidized), Federal PLUS Loans, and Federal Consolidation Loans. Funds for these programs are provided by private lenders and the loans are guaranteed by the federal government.
FederalPLUSLoan Federal loans available to parents of dependent undergraduate students to help finance the child’s education. Parents may borrow up to the full cost of their children’s education, less the amount of any other financial aid received. PLUS Loans may be used to pay the EFC. There is a minimal credit check required for the PLUS loan, so a good credit history is required.
Federal Stafford Loans Federal loans that come in two forms, subsidized and unsubsidized. Subsidized loans are based on need; unsubsidized loans are not. The federal government pays the interest on the subsidized Stafford Loan while the student is in school and during the 6-month grace period. The Subsidized Stafford Loan was formerly known as the Guaranteed Student Loan (GSL). Undergraduates may borrow up to $23,000 ($2,625 during the freshman year, $3,500 during the sophomore year and $5,500 during the third, fourth and fifth years) and graduate students up to $65,500 including any undergraduate Stafford loans ($8,500 per year). These limits are for subsidized and unsubsidized loans combined. The difference between the subsidized loan amount and the limit may be borrowed by the student as an unsubsidized loan.
Federal Supplemental Education Opportunity Grant (SEOG) Federal grant program for undergraduate students with exceptional need. SEOG grants are awarded by the school’s financial aid office, and provide up to $4,000 per year. To qualify, a student must also be a recipient of a Pell Grant.
Federal Work-Study (FWS) A program providing undergraduate and graduate students with part-time employment during the school year. The federal government pays a portion of the student’s salary. For this reason, work-study students often find it easier to get a part-time job. Eligibility for FWS is based on need. Money earned from a FWS job is not counted as income for the subsequent year’s need analysis process.
Free Application for Federal Student Aid (FAFSA) The official document used by every college and university to determine eligibility for Federal Student Aid. A copy of this document is often required by a scholarship program.
Financial Aid Money provided to the student and the family to help them pay for the student’s education. Major forms of financial aid include gift aid (grants and scholarships) and self-help aid (loans and work).
Fixed Income Income from investments such as CDs, Social Security benefits, pension benefits, some annuities, or most bonds that is the same every month.
401(k) Plan A defined contribution plan that may be established by a company for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 401(k) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½.
403(b) Plan A defined contribution plan that may be established by a nonprofit organization or school for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Contributions and earnings will compound tax deferred. Withdrawals from a 403(b) plan are taxed as ordinary income, and may be subject to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½.
Free Application for Federal Student Aid (FAFSA) Form used to apply for Pell Grants and all other need-based aid. As the name suggests, no fee is charged to file a FAFSA.
Fundamental Analysis An approach to the stock market in which specific factors – such as the price-to-earnings ratio, yield, or return on equity – are used to determine what stock may be favorable for investment.
Gift Taxes A federal tax levied on the transfer of property as a gift. This tax is paid by the donor. The first $10,000 a year from a donor to each recipient is exempt from tax. Most states also impose a gift tax. The gift tax exemption is indexed annually for inflation.
Grant Federal, state or institutional aid which the student doe not have to pay back.
Gross Income Income before taxes, deductions and allowances have been subtracted.
Holographic Will A will entirely in the handwriting of the testator. Without witnesses, holographic wills are valid and enforceable only in some states.
Hope Scholarship Credit A tax credit that may be claimed for qualified tuition and expenses for student enrolled at least half time in one of the first two years of post-secondary education.
Income The amount of money received from employment (salary, wages, tips), profit from financial instruments (interest, dividends, capital gains), or other sources (welfare, disability, child support, Social Security and pensions).
Independent Student Must meet one of the following conditions: twenty-four years of age or older; an orphan; a ward of the court; a veteran of the US Armed Forces; is married; has a child; is a graduate or professional student; has serious family circumstances.
Index A calculation that uses a selection of stocks or bonds to gauge a certain market. The Dow Jones Industrial Average, for example, is an index of 30 large industrial companies on the New York Stock Exchange.
Individual Retirement Account (IRA) Contributions to a traditional IRA – up to $2,000 per year – are deductible from earned income in the calculation of federal and state income taxes if the taxpayer meets certain requirements. The earnings accumulate tax deferred until withdrawn, and then they are taxed as ordinary income. Individuals not eligible to make deductible contributions may make nondeductible contributions, the earnings on which would be tax deferred.
Inflation An increase in the price of products and services over time. The government’s main measure of inflation is the Consumer Price Index.
Institutional Aid Student financial aid distributed by the schools usually in the form of grants and need-based scholarships.
Institutional Methodology If a college or university uses its own formula to determine financial need for allocation of the school’s own financial aid funds, the formula is referred to as the Institutional Methodology.
Intestate The condition of an estate left by a decedent without a valid will. State law then determines who inherits the property or serves as guardian for any minor children.
Investment Category A broad class of assets with similar characteristics. The five investment categories include cash equivalents, fixed principal, equity, debt, and tangibles.
Irrevocable Trust A trust that may not be modified or terminated by the trustor after its creation.
Joint and Survivor Annuity Most pension plans must offer this form of pension plan payout that pays over the life of the retiree and his or her spouse after the retiree dies. The retiree and his or her spouse must specifically choose not to accept this payment form.
Joint Tenancy Co-ownership of property by two or more people in which the survivor(s) automatically assumes ownership of a decedent’s interest.
Jointly Held Property Property owned by two or more persons under joint tenancy, tenancy in common, or, in some states, community property.
Keogh Plan This retirement plan, named for Eugene Keogh, is designed for self-employed individuals. Up to $30,000 or 25 percent of self-employed income (whichever is less) may be deducted from compensation and set aside into the plan.
Liability Any claim against the assets of a person or corporation: accounts payable, wages, and salaries payable, dividends declared payable, accrued taxes payable, and fixed or long-term obligations such as mortgages, debentures, and bank loans.
Lifetime Learning Tax Credit A tax credit that may be claimed for tuition and related expenses for students who are enrolled in eligible educational institutions.
Limited Partnership Limited partnerships pool the money of investors to develop or purchase income-producing properties. When the partnership subsequently receives income from these properties, it distributes the income to its investors as dividend payments.
Liquidity The ease with which an asset or security can be converted into cash without loss of principal.
Living Trust A trust created by a person during his or her lifetime.
Lump-Sum Distribution The disbursement of the entire value of a profit-sharing plan, pension plan, annuity, or similar account to the account owner or beneficiary. Lump-sum distributions may be rolled over into another tax-deferred account.
Marginal Tax Bracket The range of taxable income that is taxable at a certain rate. Currently, there are five marginal tax brackets: 15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent.
Marital Deduction A provision of the tax codes that allows all assets of a deceased spouse to pass to the surviving spouse free of estate taxes. This provision is also referred to as the unlimited marital deduction.
Merit Aid Financial aid awarded on the basis of a students academic, athletic, and/or extracurricular excellence.
Money Market Fund A mutual fund that specializes in investing in short-term securities and that tries to maintain a constant net asset value of $1.
Municipal Bond A debt security issued by municipalities. The income from municipal bonds is usually exempt from federal income taxes. In many states, it is also exempt from state income taxes in the state in which the municipal bond is issued.
Municipal Bond Fund A mutual fund that specializes in investing in municipal bonds.
Mutual Fund A collection of stocks, bonds, or other securities purchased and managed by an investment company with funds from a group of investors.
Need The difference between the COA and the EFC is the student’s financial need — the gap between the cost of attending the school and the student’s resources. The financial aid package is based on the amount of financial need. The process of determining a student’s need is known as need analysis.
Need Analysis The process of analyzing the household and financial information on the student’s financial aid application and calculating the amount the family can be expected to contribute to educational costs. The student must submit a need analysis form to apply for need-based aid. Need analysis forms include the Free Application for Federal Student Aid (FAFSA) and the Financial Aid PROFILE.
Need-Based Aid Financial aid awarded on the basis of a families financial situation. Most government sources of financial aid are need-based.
Net Asset Value The price at which a mutual fund sells or redeems its shares. The net asset value is calculated by dividing the net market value of the fund’s assets by the number of outstanding shares.
Outside Resource Aid or benefits available because a student is in school and is counted after need is determined. Outside scholarships, prepaid tuition plans and VA educational benefits are examples of outside resources.
Outside Scholarship A scholarship that comes from sources other than the school and the federal or state government.
Parent Contribution The portion of your educational expenses that the federal government believes your parents can afford. It is based on their income, the number of parents earning income, assets, family size, the number of family members currently attending a university and other relevant factors. Students who qualify as independent are not expected to have a parent contribution.
Pell Grant A federal grant that provides funds of up to $2,340 based on the student’s financial need.
Perkins Loan Formerly the National Direct Student Loan Program, the Perkins Loan allows students to borrow up to $3,000/year (5 year maximum) for undergraduate school and $5,000/year for graduate school (6 year maximum). The Perkins Loan has one of the lowest interest rates and is awarded by the financial aid administrator to students with exceptional financial need. The student must have applied for a Pell Grant to be eligible. The interest on the Perkins Loan is subsidized while the student is in school.
Pooled Income Fund A trust created by a charitable organization that combines the contributions of several donors and distributes income to those donors based on the earnings of the trust. The trust is managed by the charitable organization, and contributions are partially deductible for income tax purposes.
Portfolio All the investments held by an individual or a mutual fund.
Preferred Stock A class of stock with claim to a company’s earnings, before payment can be made on the common stock, and that is usually entitled to priority over common stock if the company liquidates. Generally, preferred stocks pay dividends at a fixed rate.
Prenuptial Agreement A legal agreement arranged before marriage stating who owns property acquired before marriage and during marriage and how property will be divided in the event of divorce. ERISA benefits are not affected by prenuptial agreements.
Price/Earnings Ratio (P/E Ratio) The market price of a stock divided by the company’s annual earnings per share. Because the P/E ratio is a widely regarded yardstick for investors, it often appears with stock price quotations.
Principal In a security, the principal is the amount of money that is invested, excluding earnings. In a debt instrument such as a bond, it is the face amount.
Probate The court-supervised process in which a decedent’s estate is settled and distributed.
Professional Judgment While the method for determining the student’s need for federal student aid is defined in the law, it does give the financial aid administrator the flexibility to make individual adjustments due “special conditions”. These adjustments must be made on a case-by-case basis, and the reasons for the adjustment must be documented in the student’s file.
Profit-Sharing Plan An agreement under which employees share in the profits of their employer. The company makes annual contributions to the employees’ accounts. These funds usually accumulate tax deferred until the employee retires or leaves the company.
Prospectus A document provided by mutual fund companies to prospective investors. The prospectus gives information needed by investors to make informed decisions prior to investing in a specific mutual fund. The prospectus includes information on the minimum investment amount, the fund’s objectives, past performance, risk level, sales charges, management fees, and any other expense information about the fund, as well as a description of the services provided to investors in the fund.
Qualified Domestic Relations Order (QDRO) At the time of divorce, this order would be issued by a state domestic relations court and would require that an employee’s ERISA retirement plan accrued benefits be divided between the employee and the spouse.
Qualified Retirement Plan A pension, profit-sharing, or qualified savings plan that is established by an employer for the benefit of the employees. These plans must be established in conformity with IRS rules. Contributions accumulate tax deferred until withdrawn and are deductible to the employer as a current business expense.
RenewalFAFSAApplication An application that simplifies the process of reapplying for financial aid. Some of the information from the student’s previous year application is preprinted on the Renewal FAFSA application. Students do not have to enter new information if the preprinted information is still correct.
Revocable Trust A trust in which the creator reserves the right to modify or terminate the trust.
Risk The chance that an investor will lose all or part of an investment.
Risk-Averse Refers to the assumption that rational investors will choose the security with the least risk if they can maintain the same return. As the level of risk goes up, so must the expected return on the investment.
Rollover A method by which an individual can transfer the assets from one retirement program to another without the recognition of income for tax purposes. The requirements for a rollover depend on the type of program from which the distribution is made and the type of program receiving the distribution.
RothIRA A nondeductible IRA that allows tax-free withdrawals when certain conditions are met. Income and contribution limits apply.
Satisfactory Academic Progress Some scholarships can be taken away if a student is not making measurable progress towards the completion of a course of study.
Scholarship A form of financial aid given to undergraduate students to help pay for their education. Scholarships are a form of gift aid and do not have to be repaid.
Scholarship Search Service A service that charges a fee to compare the student’s profile against a database of scholarship programs. Few students who use a scholarship search service actually win a scholarship.
Security Evidence of an investment, either in direct ownership (as with stocks), creditorship (as with bonds), or indirect ownership (as with options).
Simplified Employee Pension Plan (SEP) A type of plan under which the employer contributes to an employee’s IRA. Contributions may be made up to a certain limit and are immediately vested.
Single-Life Annuity An insurance-based contract that provides future payments at regular intervals in exchange for current premiums. Generally used as a supplement to retirement income and pays over the life of one individual, usually the retiree, with no rights of payment to any survivor.
Special Conditions Unusual circumstances, such as excessive medical expenses, elementary or secondary private school tuition, loss of job, death or divorce, which would impact the parent’s ability to pay college costs. In such situations, the Financial Aid Administrator may use his “professional judgment” to adjust the Expected Family Contribution.
Split-Dollar Plan An arrangement under which two parties (usually a corporation and employee) share the cost of a life insurance policy and split the proceeds.
SpousalIRA An IRA designed for a couple when one spouse has no earned income. The maximum combined contribution that can be made each year to an IRA and a spousal IRA is $4,000 or 100 percent of earned income, whichever is less. This total may be split between the two IRAs as the couple wishes, provided the contribution to either IRA does not exceed $2,000.
Student Aid Report (SAR) The document printed by a FAFSA processor and mailed to the student. The SAR contains the family’s financial and other information reported by the student on the financial aid application. The student’s Expected Family Contribution (EFC) and Pell Grant eligibility are indicated on the front of the SAR.
Student Contribution The amount of money the federal government expects the student to contribute to his or her education and is included as part of the EFC. The amount depends on the student’s income and assets.
Tax Bracket The range of taxable income that is taxed at a certain rate. Brackets are expressed by their marginal rate.
Tax Credit Tax credits, the most appealing type of tax deductions, are subtracted directly, dollar for dollar, from your income tax bill.
Tax Deferred Interest, dividends, or capital gains that grow untaxed in certain accounts or plans until they are withdrawn.
Tax-Exempt Bonds Under certain conditions, the interest from bonds issued by states, cities, and certain other government agencies is exempt from federal income taxes. In many states, the interest from tax-exempt bonds will also be exempt from state and local income taxes.
Taxable Income The amount of income used to compute tax liability. It is determined by subtracting adjustments, itemized deductions or the standard deduction, and personal exemptions from gross income.
Technical Analysis An approach to investing in stocks in which a stock’s past performance is mapped onto charts. These charts are examined to find familiar patterns to use an an indicator of the stock’s future performance.
Tenancy in Common A form of co-ownership. Upon the death of a co-owner, his or her interest passes to his or her chosen beneficiaries and not to the surviving owner or owners.
Term Insurance Term life insurance provides a death benefit if the insured dies. Term insurance does not accumulate cash value and ends after a certain number of years or at a certain age.
Testamentary Trust A trust established by a will that takes effect upon death.
Testator One who has made a will or who dies having left a will.
Total Return The total of all earnings from a given investment, including dividends, interest, and any capital gain.
Transcript All classes taken and all grades received by a student. An official transcript is sent by the school with an original signature of a school official.
Trust A legal entity created by an individual in which one person or institution holds the right to manage property or assets for the benefit of someone else. Types of trusts include: Testamentary Trust – A trust established by a will that takes effect upon death; Living Trust – A trust created by a person during his or her lifetime; Revocable Trust – A trust in which the creator reserves the right to modify or terminate the trust; Irrevocable Trust – A trust that may not be modified or terminated by the trustor after its creation.
Trustee An individual or institution appointed to administer a trust for its beneficiaries.
Trustee-to-Trustee Transfer A method of transferring retirement plan assets from one employer’s plan to another employer plan or to an IRA. One benefit of this method is that no federal income tax will be withheld by the trustee of the first plan.
Unified Credit A credit that may be applied against an individual’s gift or estate taxes. The unified credit will increase in gradual steps until it eventually exempts an estate valued up to $1,000,000 from federal estate taxes in 2006.
Universal Life Insurance A type of life insurance that combines a death benefit with a savings element which accumulates tax deferred at current interest rates. Under a universal life insurance policy, the policyholder can increase or decrease his or her coverage, with limitations, without purchasing a new policy.
Variable Universal Life Insurance A type of life insurance that combines a death benefit with a savings element that accumulates tax deferred at current interest rates. Under a variable universal life insurance policy, the cash value in the policy can be placed in a variety of subaccounts with different investment objectives. The policyholder can transfer funds among the subaccounts as he or she wishes. Fees are charged after a certain number of transfers.
Verification A process of checking the information the student reported on the financial aid application. Many schools conduct their own form of verification. In addition, schools may be required to verify students as selected by the federal central processing system or state aid organization.
Volatility The range of price swings of a security or market over time.
Welfare Benefit Plan An employee benefit plan that provides such benefits as medical, sickness, accident, disability, death, or unemployment benefits.
Whole Life Insurance A type of life insurance that offers a death benefit and also accumulates cash value, tax deferred at fixed interest rates. Whole life insurance policies generally have a fixed annual premium that does not rise over the duration of the policy. Whole life insurance is also referred to as “ordinary” or “straight” life insurance.
Will A legal document that declares a person’s wishes concerning the disposition of property, the guardianship of his or her children, and the administration of the estate after his or her death.
Yield In general, the yield is the amount of current income provided by an investment. For stocks, the yield is calculated by dividing the total of the annual dividends by the current price. For bonds, the yield is calculated by dividing the annual interest by the current price. The yield is distinguished from the return, which includes price appreciation or depreciation.
Zero-Coupon Bond This type of bond makes no periodic interest payments