Private Loans (Alternative Loans)
Alternative Loans are private loans that are made through lending institutions that are not necessarily part of the federal government’s programs. They can be more expensive than federal government guaranteed loans.
Students are strongly encouraged to complete the Free Application for Federal Student Aid (FAFSA) first when looking into loan options. Stafford and PLUS Loans are processed first, and tend to have a lower interest rate, which may be the best loans for funding your education.
Many families find that supplemental borrowing provides an important resource for financing educational expenses. The borrowing options described below may be of interest to those who:
- have little or no eligibility for need-based financial aid programs,
- need additional assistance to pay college costs after other forms of aid have been awarded,
- are classified as nonresident students and need additional resources to “fill the gap” between need-based financial aid and college costs, or
- have circumstances (e.g., a medical condition) leading to unusual costs above the standard cost of attendance budgets used by the Office of Financial Assistance (OFA).
What to look for in Private Loans
Look for all of the following terms and conditions when shopping for a loan. Compare rates and pick the best loan for you in both the short-term, and the long-term.
Annual Percentage Rate (APR) – The annual cost of your loan including fees and charges in addition to interest. Compare these rates and shop around for the best one that you can get.
Repayment Incentives – Savings that reward borrowers who make payment on time.
Loan Limits – Annual limits or a total limit on what you can borrow.
Federal Loan Lender – The lender participates in the Federal Family Education Loan Program.
Pre-approval – Approval may be quicker if it can be done over the phone or online.
Co-signer – A co-signer may or may not be required; a co-signer may help reduce the cost of the loan.
Interest capitalization – Interest incurred while you are in school may be added to your principle balance; it may be capitalized at repayment or annually, which is more expensive.
Repayment Schedule – Repayment may begin immediately or after you graduate or leave school.
Repayment Period – The length of time you have to repay the loan.
Comparison Chart (With Questions to Consider):
|Loan||Federal Direct PLUS Loan and Grad PLUS Loan||Private Educational Loan||Questions to Consider|
|Program/Sponsor||U.S. Department of Education (federally funded)PLUS Loan: Click here for application informationGrad PLUS Loan: Click here for application information||Various banks and loan companies||Will the company sell your loan to another company?How long has the company been offering student loans?|
|Eligible Borrower and Loan Amount||PLUS: Parent borrows on behalf of undergraduate dependent student enrolled at least half-time in a degree or certificate program. Parent and student must be U.S. citizens or eligible non-citizens. Student must not be in default on prior educational loans and must be making satisfactory academic progress. Student does NOT have to complete the Free Application for Federal Student Aid (FAFSA), unless applying for other aid.Grad PLUS: Graduate student who is a U.S. citizen or eligible non-citizen enrolled at least half-time in a degree or certificate program. Must be making satisfactory academic progress. Borrower must complete the Free Application for Federal Student Aid (FAFSA) to be eligible.Loan amount: Cost of attendance minus financial aid offered. No cumulative loan maximum.||Student who is a U.S. citizen or permanent resident.Loan amounts often are cost of attendance minus financial aid offered. Sometimes set by school. Often include a yearly and/or cumulative cap (can be as high as $250,000 for undergraduates).|
|Interest Rates and Fees||Fixed interest rate of 7.9% (See ww.ed.gov/offices/OSFAP/ DirectLoan/calc.html). 0.25% interest rate reduction with electronic auto-debit payments.2.5% origination fee (4.0% fee with a 1.5% rebate if first 12 monthly payments are made on time).Grad PLUS: Interest begins accruing immediately; may be paid periodically or capitalized.||Fees range from 0% to 12%, depending on borrower’s credit. Some have origination fee. Interest rates generally PRIME -1% to +7.75% or LIBOR +1% to +8%.||What is the interest rate of the loan? Is it fixed or variable? If it is variable, does it have a cap?How is the interest rate calculated and capitalized?Does the lender charge any fees?|
|Repayment Terms||Repayment of principal and interest begins 60 days after disbursement.Repayment period up to 25 years.No penalty if prepaid.Multiple repayment plans are available.PLUS: For PLUS loans first disbursed after July 1, 2008, parents have the option of deferring repayment until six months after the dependent student is no longer enrolled at least half-time. To request deferment, call 1-800-848-0979.Grad PLUS: Can opt to pay interest and principal while in school or interest and principal can be deferred while borrower is enrolled at least half-time (borrower must request an in-school deferment).||Ranges from 0 to 25 years, often depending on amount of loan||When does repayment begin? If payments begin immediately, can you afford to make the monthly payments? If payments begin later (deferred), do you understand how the interest will be calculated?|
|Basic credit check required: Borrower cannot be 90 days or more delinquent on the repayment of any debt (with additional flexibility for mortgage or medical debt) or the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or write-off of a Title IV debt during the last five years.Consolidation: Both loans can be consolidated; Grad PLUS Loans can be consolidated with other federal loans.||Co-signer may be required and/or may reduce interest rate and loan fees. Interest rates, fees, and loan limits depend on credit history of borrow/co-signer, loan options, and repayment schedule.||What do student blogs say about the company? This is one of the best way to gauge a company’s costumer service reputation. Customer service might not be important to you now, but it will be when you begin repaying the loan.|
Typical loan payments are shown in the example below:
Annual Percentage Rate (APR) Example:
|Interest Rate||APR||Monthly Payment||APR||Monthly Payment|
Undergraduate students: This APR example is based on borrowing a $6,000 undergraduate loan with a 38-month deferral period followed by a 240-month repayment period. The Prime Rate is assumed to be constant at 8.25%.
Graduate students: This APR example is based on borrowing an $8,000 graduate loan with a 27-month deferral period followed by a 240-month repayment period. The Prime Rate is assumed to be constant at 8.25%.
Interest rates indexed to the Prime Rate as published in The Wall Street Journal will vary. As of June 3, 2009, the published Prime Rate was 3.25%. The APR will increase if the Prime Rate increases and would result in a higher monthly payments, an increase in the number of scheduled payments, or both.
A Word of Caution to Private Loan Borrowers
UIS students should avoid lenders that do not require UIS certification of their loan application and, in general, should be suspicious of unsolicited loan offers. The financial aid community cautions students that “loan debt can accumulate quickly and result in a lifetime burden of high payments and credit denials for automobile purchases, credit cards, and home mortgages. Private loans also can reduce eligibility for more desirable federal, state and college aid programs. To avoid these problems, read and understand the terms and conditions of all loans.”