Alternative Student Loans

This article deals with alternative student loans. It describes the need, use and negatives of alternative student loans.

Updated by Anuroop C on 26th February 2020

You thought your scholarships, grants and federal loans will cover your tuition fees. But now, you are back to searching for more student loans. You can no longer use the loan facilities by Federal Student loans. All your savings and your parents’ savings are into paying your college fees. Yet there are a lot of expenses to cover. What you gonna do? Your best option might be to take a private student loan. These are the only alternative student loans that you can take to fulfill your needs and pay your tuition. But make sure that ALL your Federal loan options are exhausted and you have used all your scholarships and grants to your fullest before searching for an alternative.

Table of Contents

Are all your Federal Student Loan options exhausted?

The Federal Government provides student aid to students in their colleges and universities. You can apply by filling out the FAFSA( Free Application for Federal Student Aid) to get that aid.

If yes then you can search for alternatives because Federal Student loans are the only loans that can provide you with a lot of benefits such as Income-driven Repayment program, Student loan Forgiveness and much more. And the interest rates for Student Loans are set by Congress. Hence there is a slight chance that they are actually lesser compared to Private loan lenders. 

However, to qualify for a Federal loan program you must fall within a certain income range, have a demonstrably low EFC and prove that you have no history of defaulting on any previous student loans. Federal loans offer the least fixed interest rates available and often they are being subsidized by the government, meaning the Federal government will pay the interest while you are busy studying in college.

Hence Federal Student loans should be your first and only priority before even thinking of an alternative. In case you have already taken out student loans in your name by taking all the necessary steps for a Federal Student Loan, then you might want to try out taking the Parent Plus Loans that are provided by the Federal Government if your parents are ready to take a loan for your sake. 

If you have gone through all of the above options and yet your education expenses are not covered then you can consider alternative student loans aka Private student loans.


Looking for student loans? Find the best student loans just for you.


Alternative Student Loans

Alternative student loans are nothing but Private Student loans. Private money lenders usually comprise of banks, credit unions and online lenders who look at the necessity of students as an investment opportunity. Therefore they require a credit score check, for them to grant you student loans. But it is not that often that a student just getting out of high school to have a good credit score. And usually, with a bad credit score, the lender usually does not give a student loan, at least not one with good interest rates. That is the reason why private student loans often require a cosigner, who has a solid credit score, to sign along with the student. 

This cosigner can be anyone- a parent or a guardian, as long as they have a good credit score. However, there is a  catch and that is your cosigner is also responsible for your loan and any delay during the repayment shall affect not only yours but their credit score as well. 

Although some student loan lenders do not need a cosigner, it will be important that you have high future income potential. They usually check with your future income potential, based on your course, your year of study and the school you are studying in. A higher future income potential shall increase your chance of getting a Student loan with a lesser rate of interest and a better repayment plan and a higher principal amount.  But this is a rare case as many other factors can come into play and affect your chances of getting a student loan.

Hence it is very important that you choose a private loan lender who shall provide cosigner release and other options, and it can become a tough task to find the Private Student loan best suitable for your need in the plethora of private student loans available in the market. Lenders will often require you to attend a Title IV school, which means your school processes federal student aid. Some lenders don't offer loans in certain states.

Above 600 is usually considered a good credit score. This good credit score allows you to get lower interest rates. Interest rates are of two types- fixed and variable, unlike the Federal Student loans whose interest rates are fixed. And this interest rate is set up depending upon the credit score that you are providing to the banks. It is usually advisable that you opt for a fixed rate of interest, but it all depends on the situation. If the variable interest rate’s range is on the lower side or your term is short, then you can opt for a variable interest rate.

However, you must take extra precautions whilst applying for a private student loan. 

Measures to be taken before you can apply for an alternative student loan

These are the different measures that need to be considered before taking a private student loan

Exhaust all your Federal loan options:

This point can never be stressed enough. Please always make sure that you have maxed out all your Federal Student Aid options to make sure that you get to experience the benefits of them. In the future, in case you can’t make a payment, Federal loans give you the option of Income-driven loan repayment options, forbearances, student loan forgiveness, and other benefits. And you shall not be arrested for not paying your student loans. But not paying your private student loans, can cause you a lot of legal problems. Though they cannot put you in jail without getting a warrant from the judiciary, they can easily get them and you can even be put into jail.

Never borrow money more than you actually need to pay the costs of your college:

Since private loan lenders levy a higher interest rate than the Federal Government you will end up paying more interest amount than you will actually require.

Do not rush into any loan agreement:

Make sure you have done proper research and have a good understanding of all the terms for you to understand all the terms and conditions that you are required to sign in order to get a loan from a private lender. Make sure you properly read them, at least twice to be on a safer side.

Know your benefits:

Make sure you know all your benefits that your private loan lender is providing. These benefits usually include no origination, application, prepayment or late fees.

Make sure the loan covers all your costs:

Make sure that the loan amount covers your undergrad, grad school and professional degrees as well as career training. Also, know about their Loan Repayment Plans and they help you in building your credit.

Make sure they have a cosigner release available:

It is important to make sure that your loan lender allows for a cosigner release. It is important that you become an independent loan bearer as any mishaps in this process will affect them directly and harshly. Even their retirement could be delayed for a while when you are involving them as a cosigner. And in case you fail to make payments, they will be completely responsible for your default and they should make payments. Private Student loan default is a serious offense and is never good for your credit future.

Look for good deals:

Before you proceed with a private loan, make sure of all the available options in the market. Conduct an exhaustive search on private student loan lenders, their interest rates and the benefits that they are providing. And choose the best private student loan plan that suits your needs.


Negatives of alternative student loans

Here are some of the disadvantages that might make you want to reconsider taking private student loans.

  • Higher interest rates than Federal Student Loan

  • Lesser number of repayment options when compared to Federal Student Loans

  • Can almost never be discharged, even when you declare bankruptcy

  • Credit damage will affect your chances of taking another loan or mortgage, in the future

Student loans are financial commitments that you will stay with for a large part of your adult life. Hence it is important that you make a good decision. For many students it is might be the first time that they are taking a loan. Hence more emphasis should be given on the loan you are about to take. Consider any borrower protections your private lender offers, including deferment and forbearance, as well as student loan repayment options. You may also have the option to choose your loan term, which means you could pay off your loan faster and with less interest by making higher payments or pay lower amounts with more interest over a longer period of time.

One must always remember that getting the loan is usually the easy part and paying them back is the actual challenge. Hence it is important to note that the decision you will make NOW will impact the easiness with which you win over that challenge. It can also be better to choose a loan that offers a grace period as you always might not end up with income immediately after your college. If you are going through difficult times or want to know other options of how to deal with private student loans after college, you can consider Refinancing your Private Student Loans or Consolidation of Private Student Loans. Know the Best Companies that refinance your student loans.