Private Alternative Loans for Undergraduates

 

Private alternative loan programs have grown in popularity in recent years. However, we firmly believe that families should exhaust their eligibility for all federal loan programs before turning to this resource. In almost all cases, Federal Student Loans will provide the consumer with more beneficial terms and conditions, including a lower annual percentage rate charged on the principal and fewer and lower fees.

 In This Section:

Important Policies | Choosing a Lender | Interest Rates | Credit Issues | Peer to Peer Lending | Direct to Consumer Loans |

 

Important Policies

Bankruptcy Relief for Private Student Loan Borrowers Advances

The House Judiciary Committee's Subcommittee on Commercial and Administrative Law took a stand for students and consumers by passing the Private Student Loan Bankruptcy Fairness Act of 2010 (H.R. 5043)on September 15, 2010. The bill reverses the unfair and unjustified special protections for lenders of private student loans enacted in 2005. There have been two hearings on the topic in the past year, but this was the first time this bill came up for a vote, and it passed 6-3 with no amendments. Under the new legislation private student loans would once again be treated like other consumer debt in bankruptcy.

The bill still needs to pass the Judiciary Committee, the House floor, and the Senate. Urge your members of Congress  to cosponsor H.R. 5043 and S. 3219 in the Senate so that we can keep up the momentum!

No FAFSA Certification

In order to comply with recent legislation aimed at providing increased consumer protections to students, borrowers who do not currently have a Free Application for Federal Student Aid ("FAFSA") on file with our office, will need to complete an institutional certication form before we will process a private, credit-based alternative loan.

Impact of the Higher Education Opportunity Act (HEOA) of 2008

The Higher Education Opportunity Act of 2008 ( HEOA)mandated a number of significant changes to provide a significant amount of additional information to families who choose to utilize private educational loans.  Title X of the HEOA , which originally began as the Private Student Loan Transparency and Improvement Act of 2007  change the disclosure requirements for the Truth In Lending Act ("TILA") for private education loans made expressly for post-secondary education expenses.

These regulations will go into effect on February 14, 2010.  

Choosing A Lender

Families are free to choose any lender which best serves their needs. You should visit each potential lender's web site to fully evaluate the benefits that they offer before making a final choice of a lender for your loans.

 

 Interest Rates

Private Lenders can choose between a number of different options in choosing how they will assess the interest they will charge you for your loan. BankRate.com lists most of the major indexes including:

  • Prime Rate - The prime rate is defined by The Wall Street Journal (WSJ) as “The base rate on corporate loans posted by at least 75% of the nation's 30 largest banks.” It is not the ‘best' rate offered by banks. The WSJ is used as the official source of the prime rate. Many (if not most) lenders specify this as their source of this index. The prime rate does not change at regular intervals. It changes only when the nation's “largest banks” decide on the need to raise, or lower, their “base rate.” The prime rate may not change for years, but it has also changed several times in a single year
  • "LIBOR" - LIBOR is an abbreviation for “ London Interbank Offered Rate,” and is the interest rate offered by a specific group of London banks for U.S. dollar deposits of a stated maturity. LIBOR is used as a base index for setting rates of some adjustable rate financial instruments, including Adjustable Rate Mortgages (ARMs).

View a report on the average interest rate on a private student loans.

Credit Issues

Your "credit score" will often determine whether or not a lender will be willing to extend credit to you.  Read about "Why Your Credit Score Is Important"

"Peer to Peer" Lending Programs

These new programs are starting to receive coverage in the media. Families should CAREFULLY review the terms of loans through any of these programs. We would again encourage families to fully utilize all federal aid programs before turning to this source of funds.

"Direct to Consumer" Loans

A growing number of private lenders are marketing private loans directly to students. These loan programs are set up to totally circumvent the financial aid office. Legitimate lenders should be following basic standards in their dealings with families.

The Department of Education has ruled that these loans must be counted as a resource in determining a student's eligibility for federal financial aid funds. If we discover you have received one of these loans, we will have to adjust your financial aid award to incorporate this loan into your package. This would normally result in the loss of "better" aid funds (need-based grants and scholarships and government subsidized loans). Please speak with your counselor BEFORE pursuing this option.

 

"Wall Street Reform" and Student Loans

 

Updated March 11, 2011