Alternative Student Loans
Financing Your Education: Alternative College Loans
Alternative student loans, also known as private student loans, are specialized college student loans designed to provide supplemental funding to cover unmet need. They are typically provided by banks or other institutions, and because of this, are not federally funded. The vast majority of all financial institutions offer private student loans to qualifying applicants; however, each lending institution may vary their terms and conditions on a case by case basis. Prospective students should explore all federal and state options before applying to a private student loan. Private lenders tend to place more restrictive terms on alternative student loans than their counterparts. Prospective students should conduct the proper research, read the loan contract, and think carefully before committing to a loan that will take years to repay.
Title IV federal student loans greatly differ from private alternative loans, mainly because federal loans have guarantees and safeguards against default. The safeguards may protect the student in the event something happens that prevents him or her from repaying the loan. Title IV federal loans include Stafford loans, Perkins loans, and PLUS loans. As private loans are not guaranteed by the government, private education lenders do not need to adhere to government regulations that require fixed interest rates or specific repayment terms on their student loans. Students who obtain a private student loan must repay all of the interest accrued during school and after graduation. After graduation, the student also has limited ability to postpone or lower payments with private alternative loans compared to federal loans.
Private lending institutions will issue alternative loans to student's based on their ability to repay the loan. They assess this ability by conducting credit checks to see if the student has a bad credit track record. If the student has a bad credit rating, then he or she may be subject to higher interest rates than that of federal student loans. Each lending institution will have varying rates, terms and conditions. It does not take much to obtain an alternative student loan. In fact, most private lending institutions base their approval process on whether the student can repay the loan. If the student does not have sufficient credit, then the private lending institution will often require a Cosigner or guarantor that will assume the role of repaying the loan in the event that the borrower cannot manage the payments. All students must be U.S. citizens and permanent residents of the U.S. state that the lending institution resides. Even if the student meets all of the eligibility requirements, the private lending institution still reserves the right to decline the application for an alternative student loan.
Students can use a private educational loan on their tuition, books, learning materials, equipment, room and board, and transportation expenses. While the student receives the money from the school after disbursement, he or she will likely place a large percentage of the funds towards their intended goal, especially if private loans are their only option. Some students do not qualify for federal student loans or scholarships; therefore, their only resort to funding their education will come from a private lender. In addition, graduates usually become burdened with large debt sums after completing their degree. The vast majority of private student loans do not offer deferment or forbearance periods, which means the student will find themselves in a predicament if they cannot find a suitable job to start repaying the principle and accrued interest. Bankruptcy courts do not forgive student loans unless the student becomes swamped in a dire situation.
Follow these links to learn more about alternative student loans:
- Private (or Alternative) Student Loans (PDF): An extensive document providing answers to frequently asked questions (FAQ) about alternative student loans.
- Alternative Student Loan FAQs: A comprehensive document that defines and explains how the alternative student loan process works.
- How to Choose a Private Student Loan (PDF): Consumer Reports offers a checklist for students interested in applying for a private student loan. It helps the student decide which private loan will serve to fund his or her higher education.
- Student Loans: Avoiding Deceptive Offers (PDF): The Federal Trade Commission offers a comprehensive document that explains how borrowers can avoid student loan scams.
- Private Student Loans: The Florida Atlantic University's Financial Aid Office offers pertinent tips for students looking for alternative student loans that fall outside of government-backed funds.
- Alternative/Private Student Loans: A short and concise summary of alternative student loans, including the fine details of the application process, how to choose a reputable lender, and repayment tips and options.
- Private Education Loans (PDF): A comprehensive document that provides essential information about private education loans.
- Applying For a Student Private Loan: Louisiana State University explains how students should apply for private student loans.
- Private Educational Loans FAQ: The University of South Carolina's Financial Aid Office answers frequently asked questions about private education loans, including who, what, and how much a borrower can receive.
- Private Student Loan Helpful Hints (PDF): An extensive list of helpful hints for private student loan borrowers.
- What is an Alternative Student Loan? – An overview of what an alternative student loan is and how to select a lender.
- Types of Alternative Loans – An explanation of the different types of alternative student loans as well as information on lenders.
A few Benefits of Alternative College Loans
- No mandatory principal or interest payments until six months after graduation
- Incentives such as Cosigner release, graduation rewards and interest rate reductions
- Borrow up to your cost of attendance, based on school certification
Alternative Student Loan Eligibility
You must be a U.S. citizen or a permanent resident, and be enrolled at least half-time in a 4 or 5 year degree program.
What is the interest rate Alternative Student Loans?
The interest rate on a alternative student loan is a combination of the Prime or LIBOR rate (the Index rate) plus or minus a margin. The alternative student loan rates will fluctuate as the Index rate changes. Increasingly, lenders are offering fixed rates. Compare your options before applying.
Alternative College Loan Repayment Options
You have three options including deferment, repayment of interest only, or interest and principle.
- Full Deferral: No principal or interest payments due while enrolled in school (up to four consecutive years). Payment of principal and interest will begin 6 months either after graduation or if no longer enrolled at least half time. Interest will continue to accrue during the deferment period and will be capitalized (added to the loan balance) at the time of repayment.
- Interest Only: Pay only accrued interest while enrolled in school (up to four consecutive years). Payment of principal and interest will begin either 45 days after graduation or withdrawal from school.
- Immediate Repayment: Payment of principal and interest will begin 45 days after loan is disbursed.
Disbursement of Alternative College Loan Funds
Once you receive conditional approval, you will complete a promissory note and be required to submit documentation to verify the information on your application. If you return the requested documents quickly, you will receive your money soon afterward - it can take a few weeks for the check to be sent to your school.