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Understanding Alternative Loans
Alternative loans are credit-based consumer loans offered by a lending institution; therefore, a better credit rating secures a better interest rate. Alternative loans are separate from the federal student financial aid programs and may be more expensive than federally guaranteed loans. An alternative loan should only be used when all other options have been exhausted.
• Research Your Options
• Is an Alternative Loan Right for You?
• Things to Consider
• Resources
o Glossary
o Alternative Loans
o StudentAid.ed.gov
o Mapping Your Future
o National Student Loan Data System
o Repayment Calculator
Research Your Options
Research all possibilities for scholarships, grants, work-study, Stafford Loans and Grad PLUS loans (if appropriate) before borrowing an alternative loan. If you determine that you need an alternative loan, SPU has provided a list of lenders that provide good to excellent student and parent service and borrower benefits in an interactive on-line resource to assist you in the selection of a lender. You are not limited to these lenders and may select any lender offering an alternative loan. The information provided in the on-line resource may be helpful to determine the information you will need should you be considering a lender not included in our list. Choose the loan that best suits your needs, and borrow only what you need! Remember that excessive debt can have a negative effect on your future plans and lifestyle for years to come.
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Is an Alternative Loan Right for You?
Be aware that most alternative loans have a variable interest rate, which means that your interest rate will fluctuate with the market. Potentially, this could mean that you pay much more money over the repayment period. A loan calculator can be helpful to estimate what your monthly payments would look like. It will be helpful to identify your existing financial obligations including any federal student loans and their estimated monthly repayment amount. You may also want to determine how much can be borrowed based on future expected earnings; using a Debt/Salary Calculator can be helpful.
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Things to Consider
Determine the Amount You Need to Borrow
• It is important to borrow only the money you need to cover unmet educational expenses.
• What are your estimated education-related expenses for the academic year? What is the total of the scholarships, grants and federal student loans that you are anticipating? The difference between these two totals is your financing gap. The SPU Costs and Interactive Payment Worksheet can help you determine the amount you may want to borrow. Enrolling in an SPU payment plan may eliminate or reduce your need for a loan. If you are planning on borrowing alternative loan funds, remember that if you request additional funds later in the year the lender may need to pull your credit report again.
Consider the Cost of an Alternative Loan
• Interest rates for alternative loans typically use either the prime rate or LIBOR(London Interbank Offered Rate) as the base rate. The margin is the additional percentage point added to the base rate by the lender. LIBOR variability has been smaller than the prime rate, which has tended to experience larger, sporadic changes. Remember that the interest rate on an alternative loan is variable; the rate may increase or decrease over the life of the loan.
• Your credit rating will affect the interest rate you will be charged. Factors reviewed by lenders include your debt-to-income ratio, the length of your established credit and your payment history. Borrowers will typically receive a better interest rate the better their credit rating is. The Fair Credit Reporting Act(FCRA) ensures that you can obtain a free credit report. You may purchase a credit score from one of the three credit bureaus or when you order a free credit report from AnnualCreditReport.com. The interest rate you qualify for will have a significant effect on the cost of your loan.
Loan Amount |
Interest Rate |
Loan Term |
Monthly Payment |
Total Interest Paid |
Cumulative Payments |
$10,000 |
8% |
15 years |
$95.57 |
$7,202.60 |
$17,202.60 |
$10,000 |
11% |
15 years |
$113.66 |
$10,458.80 |
$20,458.80 |
$10,000 |
18% |
15 years |
$161.04 |
$18,987.20 |
$29,987.20 |
Amounts in this chart are estimates and are included for educational purposes only.
• Remember that a longer repayment term may mean a smaller monthly payment, but you will most likely pay more over the life of the loan due to interest that will accrue. For instance, consider the effect of lengthening the loan term in the chart below.
Loan Amount |
Interest Rate |
Loan Term |
Monthly Payment |
Total Interest Paid |
Cumulative Payments |
$10,000 |
10% |
10 years |
$132.15 |
$5,858.15 |
$15,858.15 |
$10,000 |
10% |
15 years |
$107.46 |
$9,342.80 |
$19,342.80 |
$10,000 |
10% |
20 years |
$96.50 |
$13,161.66 |
$23,161.66 |
Amounts in this chart are estimates and are included for educational purposes only.
• Interest will begin to accrue immediately, but most loans offer in-school deferment. Lenders will have different policies regarding when capitalization of interest occurs. When interest is capitalized, It is added to the principal of the loan. Therefore, the amount paid over the life of the loan will be greater if capitalization occurs more frequently.
Cosigner Requirement
• Sometimes you can get a better interest rate by having a cosigner, even if you don't need one. You may want to contact a prospective lender for answers to these questions:
o Is a cosigner required?
o If a cosigner is used will the credit of the borrower or the cosigner be used to establish the terms of the loan?
o What are the requirements for releasing a cosigner
Eligibility
Review the requirements from the lender directly or through the on-line resource we have provided for the following requirements:
• Are there any enrollment requirements?
• Is satisfactory academic progress required?
• What requirements must be met to use the loan for part due balances?
Repayment
Review information available through the on-line resource we have provided or contact the lender for more information about repayment. Important questions to ask are:
• Does the lender offer benefits for on-time payments?
• Are there any prepayment penalties?
• Are there any forbearance options?
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Resources
Glossary: Financial aid and loan terms provided by Northwest Education Loan Association (NELA).
Alternative Loans: NELA provides additional information about alternative loans that may be helpful to you.
StudentAid.ed.gov: The U.S. Department of Education provided this Web site to assist students with funding postsecondary education.
Mapping Your Future: A national, collaborative, public service project of the financial aid industry, bringing together the expertise of the industry to provide free college, career, financial aid and financial literacy services for students, families and schools.
National Student Loan Data System: The U.S. Department of Education's central database for student aid. NSLDS receives data from schools, guaranty agencies, the Direct Loan Program, the Pell Grant program, and other Department of Education programs. NSLDS Student Access provides a centralized, integrated view of Title IV loans and Pell Grants so that recipients of Title IV Aid can access and inquire about their Title IV loans and/or Pell Grant data.
Repayment Calculator
Prime Rate
LIBOR
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Last Updated: 3/12/2008
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