Loans

ALTERNATIVE LOANS

It is the policy of the Office of Financial Aid to requires that students complete the FAFSA (Free Application for Federal Student Aid) before applying for an alternative or private loan.  By completing the FAFSA, students are able to be considered Federal Direct Student Loans and can also be considered for grants.  

Before the Office of Financial Aid will certify an alternative loan, the student borrower must have made a decision on federal loans offered (not including Federal Direct PLUS Loans) or complete the Alternative Loan Confirmation Form.  This form asks the student to confirm that he or she will:

• complete the FAFSA and cancel alternative loans
• complete the FAFSA and use alternative loans as a supplment
• confirm the decision not to complete the FAFSA and use federal loans (even if the interest rate and repayment terms are better) and only use alternative loans for financing educational costs

Students who are ineligible for federal student aid are exempt from this process:

• International students
• Students who have lost financial aid eligibility because of failure to meet academic progress
• Students who are not enrolled in a degree granting program (except teacher certification and approved pre-degree programs)
• Students who have reached the maximum loan aggregate in federal student loan programs
• Students who borrow to pay a past due balance with the University of Michigan-Dearborn
• Students who are enrolled less than half-time (minimum of 6 credits for undergraduate and 4 credits for graduate students)

 
What is an alternative loan?

Why would someone borrow through an alternative loan when the interest rates from the U.S. Department of Education are so low?

How are these loans different from student loans from the U.S. Department of Education?

What factors should be considered when borrowing?

The right loan depends on individual circumstances and plans for repayment.

Federal Aid First:  Federal Student Aid Frequently Asked Questions

What is an alternative loan?
Alternative loans are non-federal educational loans normally provided by private lenders who require a credit evaluation before approval.

Why would someone borrow through an alternative loan program when the interest rates from the U.S. Department of Education are so low?

While there are categories of students who are ineligible for federal student loans (listed above), there are other reasons that students may wish to explore alternative loans as a resource.

Federal loan amounts have had limited increases over 25 years, but the cost of higher education has continued to increase. As a result, some students look to alternative loans to supplement their Federal student loans and other financial aid.

There are families who do not want to complete the Free Application for Federal
Student Aid (FAFSA) and use alternative loans as a means to meet higher education costs.

Dependent students who do not live with their parents and receive no support from them (and can document it) can complete the FAFSA without parental information and be considered for Federal Direct Unsubsidized Loans (no grants or subsidized loans). 

The Federal Direct Unsubsidized Loan has a fixed interest rate of 6.8% and a monthly repayment begins six months after graduation, dropping to below half-time status or withdrawal.  

How are these loans different from student loans from the U.S. Department of Education?
Alternative loans are funded strictly through private sources and receive no funding from the Federal government.

While alternative loans are considered educational loans, they are not eligible for loan consolidation with Federal Stafford or Federal Perkins Loans. The student who borrows from both the Federal Stafford and alternative loans will have at least two monthly payments upon entering repayment.

Students who borrow from alternative loans do not need to complete a Free Application for Federal Student Aid (FAFSA) and loan limits are not tied to academic status attained (e.g. freshman, sophomore, junior or senior.) Their own creditworthiness and the creditworthiness of their co-signers/borrowers limit students’ borrowing maximums.

Federal student loans and alternative loans are alike in that borrowing is limited to cost of attendance minus any other financial aid or resource. As educational loans, interest paid on alternative loans may qualify for student loan interest as a tax deduction (like Federal student loans). Please see your tax advisor for details.

What factors should be considered when borrowing?
The answer to this question is more complex than someone would think. Some of the factors to keep in mind are:

• Interest rate: Many alternative loans have a variable interest rate that is tied to the prime rate with an additional charge added. For example, a prime rate that is 6.5% may have .5%, 1.0%, 1.5% or 2.0% added to the prime base for a variable interest rate of 7.0%, 7.5%, 8.0% or 8.5%. You should be aware of the current prime interest rate and recent interest trends. Some lenders have a below prime interest rate for select borrowers and coborrowers.

There are also loans that have a fixed rate of interest.

• Loan fees: Loans may have an origination fee which is a percentage of your loan that is deducted from your loan proceeds or added to the total amount that you borrow. Some lenders do not charge an original fee to any borrower and others do not charge one to those borrowers with the best credit rating.

Some lenders also charge a repayment fee that is added to your loan balance when you enter repayment. A repayment fee is normally the balance of your loan plus any accrued interest.

• Co-borrower/Co-signer: Some lenders will offer a lower interest rate and lower fees to a creditworthy borrower who also has a co-borrower/signer. Co-borrowers/signers will probably be required for students who have not established a credit history or may have a less than perfect credit record.

• Repayment flexibility: Lenders may require entering a monthly repayment for both principal and interest or payment of interest on a monthly or quarterly basis. Lenders may also allow deferment of all payments until graduation. While the loan payments may be deferred, unpaid interest will accumulate.

• Frequency of capitalization on accrued interest: Students electing to defer all payments on their alternative loans will have accrued interest to repay in addition to their original loan principal.

Interest that is capitalized frequently, e.g. monthly or quarterly, will cost the borrower more than interest that is capitalized once before entering repayment. Frequent capitalization of interest compounds the interest charged.

• Approval rate: Lenders with low approval rates may have attractive terms for borrowing but may have credit requirements that are difficult to meet.

• Service: Are applications available for online processing?

• Once approved, how quickly are fund transfers sent to the school?

• Is there a toll-free telephone number to contact the lender if the borrower has questions or concerns?

The right loan depends on individual circumstances and plans for repayment.
Below are two examples that illustrate how different student circumstances and plans make a big difference in the costs of borrowing.

Case One: Assume that a student will borrow $10,000, will be in deferment for one year and will have a 15-year repayment term.

Loan One

Loan Two

With a monthly payment for 15 years, Loan One is the better choice because the
lower interest rate becomes a more important factor than no origination fees.

Case Two: Assume that a student will borrow $10,000, will be in deferment for
one year and will paid off the loan at graduation.

Loan One

Loan Two

With a quick repayment of funds, the loan without the origination fee is the less expensive option.

The best way to determine what loan is right for you and what your overall loans would be is to analyze the components of your loan.  There is a handy tool on the www.finaid.org Web site called the Loan Discount Analyzer at http://www.finaid.org/calculators/loandiscountanalyzer.phtml.   The Loan Discount Analyzer will help you determine the costs of your loan.  By taking the time to obtain more information, you can make a better choice of loan products and be a more savvy consumer.

Sample List of Alternative Loan Providers
Students and their families are able to find many loan providers who participate in alternative loan programs. In fact, there are so many providers with so many products that it is easy to be confused. To help students, the Financial Aid Information Web site has developed a comprehensive list of lenders with a great deal of additional information about private or alternative loans.  Please visit this very informational site at http://www.finaid.org/loans/privatestudentloans.phtml.

Students should be a smart consumer and research loan providers and select the one that best meets their needs.

Private or alternative loans should not be the first choice for most students.  Remember the Federal Loan Programs that are credit-based as an option for borrowing.

• Federal Direct PLUS Loan and Grad PLUS loan (administered by the University of Michigan-Dearborn for the U.S. Department of Education

The Office of Financial Aid encourages students who are eligible to apply for the Federal Stafford Loan Program by completing a Free Application for Federal Student Aid (FAFSA) before considering alternative loans. If you have concerns about whether or not you are eligible for a Federal Direct Loan, please contact the Office of Financial Aid with your questions.

Alternative loans can provide important supplemental or primary funding for students. It is also important to remember that an informed consumer may be able to reduce the amount of interest and fees paid through a careful matching of loan product and student needs.

Students choosing alternative or private loans are free to select a loan product that best suits their needs.