Alternative Loans for Undergraduates

Alternative loans are increasing in popularity year after year for undergraduate students. There are several reasons undergraduates are in need of alternative loans. The cost of tuition at public and private universities continues to increase and so does the number of students entering college each year. There is simply not enough school endowment, scholarship, and government grant money to cover the full cost of college for every student. Combine that with the fact that federal student loans have annual maximum borrowing amounts, depending on your year in school. Once you’ve used up all of your free money and maximized your federal student loans, alternative loans may be a good option to help you pay your remaining college costs.

What forms of financial aid should I use before alternative loans?

Use the diagram below to understand the forms of financial aid typically available to undergraduate students, and how much each will likely cost you.

Financial Aid Type Cost How to Apply
Scholarships Free - you don't have to pay them back!
  1. Fill out the FAFSA - for scholarships from your school
  2. Private scholarship applications - available through your school, community, or groups you are involved with Grants Free - you don't have to pay them back!
Grants Free - you don't have to pay them back!
  1. Fill out the FAFSA - to become eligible for state and federal grants
  2. Grant applications - for research, special interest or study abroad
Federal Perkins Loan 5% fixed rate (Need based loan)
  1. Fill out the FAFSA
Federal Stafford Loans (2008-2009 school year) 6.8% fixed rate unsubsidized loans
6.0% fixed rate subsidized loans
Up to 2% origination fee
  1. Fill out the FAFSA
  2. Complete a Federal Stafford Loan Application
Parent PLUS Loans Your parents can take out a federal loan at a fixed rate of 8.5%
Up to 4% origination fee
  1. Fill out the FAFSA
  2. Your parents will complete the Federal Parent PLUS Loan Application
Private Student Loans Interest rate, origination fee, and other fees vary
  1. You will likely need to find a credit-worthy co-signer
  2. Complete an application for private student loans

How much should I borrow in alternative loans?

You should only borrow what you need for school and what you feel comfortable that you can repay. Most alternative loans are school certified, which means your school will only approve a loan amount equal to the school’s cost of attendance minus your other financial aid received. Here is an example for a college freshman:

Example:

College Expenses Amount Financial Aid Amount
Tuition $10,000 Scholarship $100
Books $500 Grant $100
Food $1,000 Work Study $100
Room & Board $6,000 Federal loan (Freshman) $100
Laptop $1,500 Personal Savings $100
Total $19,000 Total $11,500
  Still need $7,500 - consider private student loans

Why are interest rates so different for alternative loans?

Interest rates vary significantly from lender to lender and from borrower to borrower:

  • Each lender creates their own alternative loan product, from pricing details to repayment rules
  • Your specific interest rate is determined by your creditworthiness and that of your co-signer. Remember that if you apply for alternative loans with two different lenders (using the same co-signer), you will likely get two different price points to compare. Make sure you compare the interest rates AND the loan fees.

Why do I need a co-signer to get approved for alternative loans?

Most undergraduate students do not have the income or credit history to qualify for alternative loans on their own. A co-signer is someone with documentable income and a strong credit history that is willing to share the responsibility of the loan with you.

Who can be an alternative student loan co-signer?

Anyone you know can be an alternative student loan co-signer as long as they are willing to share the responsibility of the loan with you. Your alternative student loan will show up on your co-signer’s credit report, and he/she will be responsible for making sure it gets paid back, just like you will be. Students can use a parent, friend or family member as an alternative student loan co-signer.

Finding a co-signer is often the most difficult part for undergraduate students. Some students struggle to find someone who is willing to share financial responsibility for the loan; some families are dealing with mortgage and credit problems. If you are having difficulties finding or approaching a co-signer for your alternative loans, read our Finding a Co-signer section. We have devoted an entire section to help you plan the conversation with your potential co-signer.