By the time someone starts looking for alternative student loans, they have already exhausted all other resources for educational aid. They are normally desperate for funding, which makes finding alternative student loans stressful and intimidating. Millions of questions run through their head such as where should I look, which lenders
should I consider and how do I get the best deal. If you are in that situation, don't worry. Finding alternative
student loans can be completely painless.
If you haven't pursued all other avenues, such as federal aid programs, scholarships and grants, you need to before you start looking for alternative student loans. Alternative student loans usually have higher interest rates and less favorable terms than federal student loans (FinAid). So, if you don't use the other sources first, you'll end up paying a lot more than necessary for your education. If you haven't already, fill out and submit a Free Application for Federal Student Aid, also known as a FAFSA. That one application will apply you for all federal student aid programs. If the award package isn't enough, then you can look for alternative student loans.
Assuming you have already gone through the FAFSA process and looked at PLUS Parent loan options, it's time to start looking for alternative student loan lenders. Because alternative student loans are offered by private lending institutions, such as banks, credits unions and savings and loan associations, you'll have to compare the prices and terms of various lenders. There are no set interest rates or standard terms like those of the federal loan programs. It's a free market where competition sets the rates. But before you start calling every bank in the phone book or browsing hundreds of Web sites, you should talk to your financial aid office.
Most financial aid offices will have a list of preferred lenders who offer fair student loan programs (College Board). Although the list is a good place to start, don't limit your options to only the lenders on the list. Do some investigating on your own because the better deal you can find, the more money you will save. To help you compare offers for alternative student loans, here is what you should look for:
- Low Interest Rates: The lower the interest rate, the less money you will have to pay for your alternative student loans. If you can find interest rates around LIBO+2.8% or PRIME+0%, you're getting a good deal (FinAid). You don't have to know what those numbers mean. Just know that the lower, the better. However, your interest rates will be based on your credit score and your cosigner's credit score, so those low rates will only be attainable if you have really good credit (Rensselaer). Regardless of your credit score, shopping around will help you get the lowest rate for your credit ranking. Another pointer to keep in mind is that the interest rates listed by lenders are often their lowest possible rates, available only if you have excellent credit (FinAid). Your rates may be much higher.
- Shortest Term Length You can Afford: The term length is how long you have to pay back your alternative student loans. In general, you'll want the shortest term length that you can afford. The sooner you can pay off your debt, the fewer payments you'll have and the less total interest you'll have to pay. However, the tradeoff for a short term length is that your payments will be larger. If you can't afford the large monthly payments, you'll need a longer term length, which will cost you more in the end. So, find the right balance between payment size and term length, but always try for the shorter term length if you can fit it into your budget.
- Low Fees: You should be able to find alternative student loans that have no fees. However, like interest rates, your credit score determines the amount of fees you'll have to pay. So, if you have bad credit, you may be unable to find alternative student loans without paying an upfront fee (FinAid). One thing to watch out for when comparing fees is that some lenders advertise that they have no fees, but they increase their interest rates to account for the fees. So, carefully compare both interest rates and fees when looking at alternative student loans. A simple rule to follow is that 3% worth of fees is equivalent to about 1% worth of interest rate (FinAid). That means, for example, that a loan with 3% fees and an 8% interest rate is equivalent to a loan that has no fees and a 9% interest rate.
- Maximum and Minimum Requirements: Some lenders set minimum and maximum requirements for alternative student loans. Before spending your time with lenders, make sure that the amount of money you need fits within their limits. With so many lenders to choose from, there's no point wasting your time with a lender that won't even consider giving you alternative student loans.
After you have gathered all the information from promising looking lenders, you'll want to spend the time to carefully compare each offer. Even if it takes you several days, do what it takes to find the best lender. The better deal you can find, the less money you will have to spend and the sooner you will be debt free.
With the perfect lender selected, it is time to apply. You'll need to either have an application mailed to you from the lender or fill one out online from the lender's Web site. The application process is easy compared to completing a FAFSA, and your financial aid office can likely help you if you run into any problems. In fact, your financial aid office may even be required to complete a portion of your application and approve the loan. Once the application is completed, either you or your school needs to submit it to the lender for processing. When you receive the results, all you'll have to do is ether accept or decline the offer. It's that easy.
If you would like more information about alternative student loans and other types of student aid, read our Student Loan Guide
. There you'll find additional resources and information about paying for college.