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College Loan

Student Loan Guide Step 6: How to Get an Alternative College Loan

    College can be expensive, and sometimes your federal college loan just isn't enough to cover your costs. When that happens it is time to start looking for an alternative college loan. Typically an alternative college loan can be more expensive than federal college loans. However, if you shop around, you will be able to find a college loan with a good interest rate and low fees.

What is a Private College Loan?

    A private college loan, also known as an alternative loan, is a loan that either a student or parent takes out from a private financial institution to help pay for college expenses. Banks, credit unions, savings and loan associations and other financial institutions can offer an alternative college loan. They work just like any other consumer loan. You receive an amount of money, and you are required to pay it back plus the added cost of interest.

When Should I get a Private College Loan?

    You should only look for a private college loan after you have exhausted all federal aid available to both students and parents (FinAid). You should have completed and submitted a Free Application For Federal Student Aid, the FAFSA, and applied for PLUS Loans. Only after that, should you seek out a private college loan.
    There are several good reasons why you should only use a private college loan as a last resort. One reasons is that they have higher interest rates than most federal college loans (Opdyke). Another reason is that eligible students who demonstrate financial need don't have to pay interest on federal loans, but private loans require you to pay interest regardless of need (Education Department). Also, unlike federal loans that don't make you start paying back until you graduate or leave school, private lenders make you start paying loans back immediately (Education Department).

How Much Does a Private College Loan Cost?

    There are three parts included in the cost of borrowing for a college loan. First, you have to pay back the amount of money you borrowed, called the principal. Second, you have to pay interest for the money you borrowed. Third, there sometimes are separate fees. Because the principal won't change from lender to lender, you should focus on the interest rate and fees when looking for the best deal. A reasonable interest rate will be LIBOR+2.8% or PRIME+0%, and you can find a private college loan without fees (FinAid). However, those low rates are usually obtainable only if you have an excellent credit history.

How Much Money Can I Get?

    An alternative college loan is intended to pay the difference between the cost of attending college and the financial aid you have already received (FinAid). For example, if your cost for attending college was $12,000, and you received $9,000 in student aid from your school, then you can borrow up to $3,000 from a private lender -- $12,000 minus $9,000 equals $3,000.

How Do I Apply For a Private College Loan?

    The first step is to shop around to find the lowest interest rates and fees. Often colleges will have a list of recommended lenders who offer good deals to students (College Board). Also, do your own research because finding the best deal can save you a lot of money in the long run. Once you have found a lender with competitive rates and fees, complete the application, whether online or in paper. You may be required to have your application approved by your school or have your school complete a portion of the application. If that is the case, visit your financial aid office. The staff will help you complete the application.

The Rest of Our Student Loan Guide:


College Board. "Dealing with the Financial Aid Office." (accessed August 4, 2006).

Education Department. "Why Get a Federal Student Loan?" (accessed August 4, 2006).

FinAid. "Private Student Loans." (accessed August 4, 2006).

Opdyke, Jeff D. The Wall Street Journal Complete Personal Finance Guidebook. (New York: Random House, Inc, 2006), 176.