Alternative Student Loans

What Is An Alternative Student Loan?

Alternative student loans are loans that are not backed by the federal student loan program.  These loans are instead backed by lending institutions who specialize in education loans.  As such, these loans are not subject to the stringent guidelines and low interest rates of the federal system. Alternative student loans are growing at a rate of almost 25 percent per year.  It is possible that in the near future there will be more alternative loans taken out then there are federal loans so understanding their costs and differences is important when financing your education.

These alternative student loans can be very costly. Students should only use them if they have exhausted other sources of financial aid. That is, if they have received all the federal subsidized and unsubsidized loans for which they are eligible. Also, every student should fill out the Free Application for Federal Student Aid to see if they qualify for grants, work study programs, or any other types of financial aid.

Alternative student loan lenders can charge fees that federal loan programs can not. These fees could increase the cost of the loan to the point where they exceed the amount of the actual loan. Even though the loan may have a low interest rate, once you add fees it may be more costly then having a higher interest rate. Trying to find a balance between the two expenses is key in ensuring that you do not overpay for your loan.

The best alternative student loans can compete with rates for federal loans. However, these loans are usually only offered to borrowers who have a good credit score and a cosigner who also has a good credit score. Lenders may try to lure you in with the promise of low rates only to find out after you have paid an application fee and had your application accepted that you are not eligible for those rates. They do this so that you, the borrower, have a more difficult time comparing lenders. 

When you find that you need to investigate an alternative student loan be sure to do a lot of research. Be sure to read all of the literature, including any new information that is given to you after you apply for the loan. Do cost comparisons with other banks that include both the cost of fees and the cost of interest. Even though these loans are widely available the lenders still have tricks that can wind up costing you a significant amount of money. Investigate your loan as carefully as you investigated your school. Another idea is to ask for better student loan consolidation rates than are offered upfront. You might be surprised at how receptive some lenders are.