Thinking Differently with Alternative Student Loans
Paying for college or university is a daunting prospect, and unless you and your parents have been saving since childhood it's highly likely that you will need some form of financial aid to make your dreams of a higher education come true. Even if you have won a scholarship, or qualified for a grant, you will likely need to supplement your college funds with some type of student loan. When it comes time to look for a loan for college, alternative student loans are one of the options you will need to consider.
The term "alternative student loans" is often interchangeable with "private student loans". These loans are often referred to as "alternative" because the most typical method of borrowing money for college is through Federal loans that are either underwritten or guaranteed by the Federal government. While Federal loans are primarily based on a student's need, alternative loans are based on the student's creditworthiness in relation to the total costs of their college education.
When Should I Get An Alternative Student Loan?
Alternative student loans can certainly help you pay for your college education, but they are not necessarily the best source of financial aid for a college bound student. Before you pursue any private lender loan you should be sure that you have utilized every Federal financial resource available to you.
First, you'll need to fill out and submit a FAFSA or Federal Free Application for Student Aid. This well help you determine if you are eligible for any Federal grants, scholarships or loan programs. Even if you are not eligible for a Federal grant, you may find you are still eligible for one of the Federal loan programs such as the Stafford, the Perkins or the Federal Direct PLUS Loan. Graduate students may also be eligible for a Direct PLUS Loan for Graduates and Professional Degree Students. Each of these loan programs offer much lower interest rates and more attractive terms than their private lender counterparts.
If, after exhausting all of your Federal options, you still cannot afford the full cost of your college education you may need to consider an alternative student loan solution. Alternative student loans are a good source of funds for college but they come with higher interest rates and much more stringent terms and repayment policies. Alternative loans should be your last stop on the road to funding your college education.
Aspects of Alternative Student Loans
Alternative student loans, or private lender student loans,differ significantly from their Federal counterparts. Federal loans are backed or guaranteed by the government, and qualification for a Federal loan is determined by the student's financial need. To qualify for a Federal loan program you must fall within a certain income bracket, have a demonstrably low EFC and prove that you have no history of defaulting on any previous student loans. Federal loans offer the lowest fixed interest rates available and oftentimes they may be subsidized by the government, meaning the Federal government will pay the interest on your loan for as long as you remain in college.
Alternative student loans, unlike Federal loans,are backed by private lending companies such as Wells Fargo, Bank of America, Wachovia or Citibank. Private student loans are determined by your credit score, and this can be a problem for many applicants. Students fresh out of high school, looking for their first college loan, are likely to have little or no credit history. This can be circumvented by using a cosigner, usually a parent or guardian, with an acceptable credit score. A cosigner agrees to be responsible for all payments against the loan should you default at any time. A cosigner with a particularly good credit rating can help you secure a loan with better interest rates and more attractive repayment terms.
Tips for Alternative Student Loan
There are a few rules of thumb that will benefit any student contemplating an alternative, or private, student loan:
- Never borrow more money than you absolutely need to cover your college costs. Alternative student loans have higher interest rates than Federal loans and the more money you borrow the more interest you will be required to pay.
- Be selective in the lender you choose, and don't just rush into any loan agreement. Find a lender that will give you the best interest rate, the lowest fees and the best repayment terms possible. Failing to look at these items will only leave you deep in debt come graduation.
- Look for good deals. Many alternative student loan companies are competing for your business, so make them work for you. Try to borrow from a company that will provide discounts on your interest rate after so many years of consistent payments. Also look for discounts if you opt to have your payments directly deducted from your checking account.
- Be observant and alert to all of the aspects of any loan you are considering. Any loan is a major undertaking, and will be part of your financial life for quite some time. Above all sign nothing until you are comfortable with the terms your lender has offered.