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Private, or Alternative, Loans

During the course of your college career, you may find that the financial aid for which you qualify doesn't quite cover all of your college costs. After you've exhausted all of your other options — including federal, state, and institutional grant and loan programs and other sources of funding — you might consider an alternative loan.

Before you go down this path, keep in mind that alternative loans generally cost more than federally-guaranteed loans. And they may have generally less-favorable repayment terms. Also, remember that there are a multitude of alternative loan options available, each of them unique. If you are considering an alternative loan, you'll need to do your homework to decide which one is best for you.

Here's some information to help you to make an educated decision about borrowing an alternative loan. In reviewing it, you'll:

Learn some of the key differences between federally-guaranteed loans and alternative loans,
Discover factors by which you can compare the various alternative loans, and
Understand how to apply for an alternative loan.

How does an alternative loan differ from a federal loan?

Alternative loans differ from federal loans in a variety of ways. For an alternative loan, you will have to complete a promissory note and submit it to the lender, at which point the lender will perform a credit check to determine whether your credit rating is favorable enough to approve the loan. If you have adverse credit, or lack sufficient credit history, your application may be denied or you may be asked to provide an endorser (also known as a co-signer) with a good credit rating in order to qualify.

There are a number of other important differences. Chief among these are the loan fees and interest rates, which are generally higher for alternative loans. Also, repayment terms are not generally as flexible for alternative loans as they are for federal loans. In addition, deferment options may be limited; and few lenders offer options to discharge (forgive) the loan under certain circumstances.

The following table lists some differences between alternative and federally-guaranteed loans to keep in mind as you make your decision about whether to borrow an alternative loan. To weigh your options, review the "Questions to ask" column for each factor.

Factors to consider	Alternative loans	Federally-guaranteed loans	Questions to ask
Interest rates	Variable interest rates tied to key interest rates, such as LIBOR or PRIME, plus a margin. The interest rate offered by the lender may also depend on your credit rating or the rating of your co-signer; as well as other non-financial factors.	Federally-set interest rate by loan type.	Which loan offers the best interest rate? How often does the interest rate vary? What rate will you qualify for based on your credit rating?
Loan fees and late charges	Lenders may set loan fees and late charges based on your credit rating or the rating of your co-signer	Federally-set loan fees by loan type; certain fees may be subsidized by the lender or guarantor. Federally-set late charges.	What are the repercussions to my loan balance, interest rate, and my credit rating if I'm late on a loan payment?
Repayment options	Loan discharge, loan forgiveness, and forbearance are generally not available; and deferment options are limited.	Certain eligible borrowers may elect to defer repayment or request a forbearance. Loan discharge and forgiveness may be options under certain circumstances.	If I return to school, experience economic hardship, become totally and permanently disabled, or die, what are my responsibilities toward my loan? Can my obligation be deferred or discharged?
Endorsers/ co-signers	Depending on the borrower's credit rating, a lender may require a co-signer before securing a loan.	A co-signer is generally not required for a Stafford loan. However, one may be required for a PLUS loan.	Do I have a good credit rating? If I need a co-signer, do I have someone who is willing to co-sign with me?

How do I compare alternative loans?

Let's say that you have exercised all other available options and decided that you must borrow an alternative loan to meet your educational expenses. Now, you should begin researching the various alternative loans available to decide which one to apply for. Make sure that when you consider the various loan terms, you compare apples-to-apples so that you can make the most informed decision possible.

For each alternative loan that you research, find out the following information.

Interest rates: What is the interest rate on the loan? How often does it vary and how is it calculated? When does interest begin accruing? If I cannot afford to make payments while attending school, will the interest be capitalized (added to the principal) and, if so, how often does this capitalization occur?
Loan fees: What are the loan fees? How are they collected-are they charged to me or subtracted from my total loan amount before my loan proceeds are sent to the school?
Repayment terms and period: When will I begin repayment on the loan? Can repayment be postponed until after I graduate or leave school? What are my various repayment options? How long will I have to repay my loan? If I use the maximum repayment period, what amount of interest will I pay over the life of the loan?
Repayment incentives: Are there any rewards for a certain number of on-time payments in terms of principal reductions, interest rate reductions, or forgiveness of remaining balances below a certain amount?

How do I apply for an alternative loan?

Before borrowing an alternative loan, carefully consider your debt and repayment obligations on all loans. Determine how much you need to borrow by working out a budget for your educational costs and subtracting all your resources for those costs.

Remember: Borrow only what you need. Alternative loans must be repaid in addition to any federal loans you may borrow. You should not, and may not be permitted to, borrow an alternative loan for more than your cost of attendance for the period of enrollment (usually the school year) minus any other federal, state, and institutional aid you have or will be awarded for that period.

If you've decided to apply for an alternative loan, here are the general steps to follow to begin the application process.

Contact your financial aid office to inform them of your alternative loan application. Although it is not a type of federal financial aid, an alternative loan may impact your eligibility for other types of aid.
Check with your lender regarding an online application/promissory note process. Keep in mind that the lender may need additional documentation to determine whether you qualify for the loan. If an online promissory note is not available and the lender instead sends you a paper promissory note, follow directions for completing and returning it.
Contact your lender's customer service center with questions regarding interest rates, loan terms, etc.
Maintain your application/promissory note and other loan-related records in one file to help you understand your loan obligations. Your promissory note describes your rights and responsibilities associated with your alternative loan.
Borrow only what you need. Be an informed borrower. Know the total amount you have borrowed, the interest rate applicable to your loan, and your repayment requirements for all loans you borrow.