Alternative Student Loans
College is an expensive business, but just because you can’t front up the money yourself, doesn’t mean you have to give up on education all together. Even if you have applied for scholarships, grants and federal loans and been unsuccessful, there is still one more possibility.
Alternative student loans can serve as a life saver when all of your other options have been exhausted. Although they are less attractive than Federal Stafford or PLUS loans due to their elevated interest rates, high fees and low repayment flexibility, they are still worth considering.
One of the main differences between Alternative Student Loans and those offered by the governement are the conditions on which the money is lent. The terms and conditions of Alternative Student Loans are established by the lender themselves, and it is important to consider the additional cost of the loan in the long term before signing any papers. One of the most important things to remember is to familarise yourself with the conditions of borrowing and repaying the loan.
There are also many sources of Alternative Student Loans, all offering differentiated terms and it is key to choose the options which suits you and your circumstances best. It is also important to pay attention to the fine-print, and be sure of any hidden costs that you might be unaware of, that may arise in the future.
Alternative Loans vs Federal Loans
Federal Stafford Loans, Parent PLUS and Grad PLUS loans all have fixed interest rates, not exceeding 8.5%.
The Federal Stafford Loan also offers an interest reduction incentive for auto-debit payements. Alternative Student Loans on the other hand have variable interest rates which are determined monthly or quarterly based on the Prime or LIBOR rate, which means some interest rates may even be as high as 18-21% if not capped.
The combined fees for the federal loans are also significanlty lower.
- Stafford Loans do not exceed 0.5% plus a 1% federal default fee. This is a very small amount to pay when compared to Alterantive Student Loan fees which do not only vary between lenders, but also may go up to 9%. This may also depend on your rate of creditworthiness – if you have a poor credit history the fees will be higher.
- The only Federal loan which requires a credit check is the Grad PLUS loan, although the result does not have an effect on the fees paid.
- Parent PLUS and Grad PLUS loans also offer lower fees with a 3% Federal Organisation Fee and a 1% Federal Default Fee, but this may be waived from the loan proceeds prior to disbursement in the case of all Federal loans.
Loan limits and insurance
In terms of loan limits, Federal Loans cover the full attendance fee, excluding any other aid which may supplement these costs. Usually Alternative Student Loans will cover the total of the attendance fees, although some lenders may limit the maximum based on creditworthiness.
Alternative Student Loans are also not automatically insured against death or permanent dissability, meaning the full amout must be paid back regardless of the circumstances. Lenders do offer insurance against these factors, but these indicate additional costs. All Federal loans include this form of insurance. The Parent PLUS loan also covers the death of the borrowing parent, as well as the permanent dissability or death of the student.
Alternative Student Loans repayment
When it comes to repayment terms, Federal Loans usually offer a flexible period of 10 years in which the loan must be paid off. Alternative Student Loans determine this period themselves, based on the amount borrowed. Federal Stafford Loans do not require any principal payments during in-school, grace and deferment periods, with the six-month grace period beginning the day the student ceases to be enrolled at least half-time.
For the Parent PLUS loan, repayments begin no later than 60 days after the final disbursement, or at the request of the parent borrower, 6 months after the date that the student ceases to be enrolled at least half-time. Typically Grad PLUS loan repayments are due 60 days after the disbursement of the loan. Alternative Student Loans vary in terms of their repayment guidelines, and may even require payments right away. When it comes to consolidation, Alternative Student Loans are scaled to credit whereas all Federal loans offer a fixed interest rate for consoliation, which doesn’t exceed 8.25%.
Deferment and forbearance
Another important factor worth considering is deferment and forbearance. Federal loans usually offer greater flexibility when it comes to payment options and may be more willing to adjust the terms of the loan based on personal circumstances. Alternative Student Loans usually offer set criteria based on the amount borrowed and the established repayment period, and are intransigent when it comes to personal circumstances. The Federal Stafford Loan offers greatest flexibility when it comes to deferment, and provides the borrower with the possibility of postponement or reduction of repayments on request.
Alternative Student Loans summary
Due to high fees and interest rates, when taking out an Alternative Student Loan it is also important to only borrow what you need to cover the costs of your studies, not what you are entitled to borrow. Taking all you can get may end up in increased interest rates, higher repayments and further uncesscary fees.
Alternative Student Loans are always less appealing than those offered through the federal governement. Always remember to first consider all other options before resulting to an Alternative Student Loan. Because they are provided by external institutions, the conditions on which the money is lent are usually in place to benefit the lender. It is important to keep in mind not only the intial cost of the loan, but also the fluctuating interest rates and conditions of repayment when determining which loan to take out. It is also important to ensure you are familiar with all of the conditions, including penalties for missed or delayed payments, insurance, and additional costs which may emerge.