Tips to Borrowing an Alternative Loan
1. Take time to carefully review your family’s financial
situation and identify every financing resource available. Be sure
to explore all options before applying for an alternative loan.
2 Determine the total amount of education debt you and your family
are willing to accumulate during the student’s college enrollment.
Take into consideration the four years worth of federal student loan
debt the student will be taking on as well as what income the
student may realistically expect after graduation. Use on-line
calculators to determine monthly payments.
3. Be careful not to borrow too much in alternative loans as it may
have an adverse effect on the future borrowing potential for the
student. Realize that even though a parent may be the co-signer on
an alternative loan, and the parent(s) is the primary borrower on a
MEFA loan, the student has the same responsibilities and obligations
for repayment as the co-signer or parent and it will effect the
student's credit score. The larger the amount borrowed, the lower
the student's credit score will be for future borrowing. A parent
PLUS loan may be a more appropriate loan to consider, as the parent
is the only borrower on a PLUS loan and the student's credit would
not be effected. Don't forget that the student will have federal
Direct student loans to pay back as well--so try to limit any
alternative or MEFA loans with the student as a borrower.
4. Think long term when choosing an alternative loan. You should
borrow from the same alternative loan program each year during your
college career. This will make repayment easier and more cost
effective for you. Private loan consolidation, combining two or more
different alternative loans into one new consolidated alternative
loan, is possible but the choices are very limited and their terms
may not be as attractive, so you must choose a loan that meets your
needs now and for the future.
5. Thoroughly review and decide how important the various features
of a loan are to you before choosing one; these features include
fees, grace periods, lengths of repayment terms, how future interest
rates are determined, co-signer release availability, borrower
benefits and incentives.
6. We recommend that students apply for an alternative loan with a
co-signer. This will reduce any fees, and lower the margin above the
index in determining your interest rate.
7. Choose a loan which has a competitive margin above the index.
This margin will determine your future interest rates. An index is a
nationally recognized interest rate that is used by the lender to
determine your future interest rates. The most popular indices are
the Wall Street Journal (WSJ) Prime Rate and the London Inter-Bank
Offered Rate (LIBOR). The margin is the amount which is added to, or
substracted from, the index which determines your interest rate. For
example, if the index is a WSJ Prime Rate of 6.00% and your margin
is 1% above the index, then your interest rate is 7.00%.
Historically, the LIBOR rate has been lower than the WSJ Prime Rate,
and therefore, the margins above the LIBOR rate are higher than the
margins above the Prime rate. For up-to-date rates for the WSJ Prime
and LIBOR indices, visit the Bloomberg web site.
8. Another consideration is the frequency of the interest rate
changes. Some loans change every three months. Some loans change
their interest rates every month. During a time of rising interest
rates having your rate change on a monthly basis will cost you more
money.
9. Alternative loans should be the last option a student should
consider. The Federal Direct and the Federal PLUS loan programs are
much better options. If you need to borrow an alternative loan be
sure that you have borrowed the maximum Federal Direct loan for
which you are eligible. First year students may borrow up to $2625;
second year students may borrow up to $3500; and $5500 for each
subsequent year; for an aggregate of $23,000.
10. Think about the length of your repayment period and how your
monthly payments will be affected. If you plan to borrow more than
$20,000 in alternative loans for your undergraduate career, you
should consider a loan which offers a 15, 20, or 25 year repayment
term. If you choose a loan with a repayment period of 12 or less
years your monthly payment will be large and not manageable. Don’t
forget that you will also have the Federal Direct loan to pay back
as well. Play around with the on-line calculators listed in tip #2
above or check out this calculator to see how interest rates and
term lengths affect your future monthly payments.
11. You may want a time period inbetween leaving school and when
monthly payments begin. Look for an alternative loan which has a
grace period when payments are not due. For example, the Federal
Direct loans have a six month grace period after leaving school or
graduating when monthly payments are not due.
12. If the student cannot make monthly principal and interest
payments while enrolled look for an alternative loan which defers
these payments. We do, however, recommend that students and/or
parents pay the interest that is charged on the alternative loan
while the student is enrolled. If the interest is not paid while the
student is enrolled the accumulated interest will be capitalized, or
added, onto the amount borrowed at repayment. By having the interest
added onto the principal at repayment, additional interest will be
charged on this capitalized interest. You want to avoid having this
happen to you as this will add to the cost of borrowing an
alternative loan.
13. Be careful of tiered pricing loans. These loans have different
fees and margins above the index depending on the credit score of
the borrower or co-borrower. The differences can be quite large.
Borrowers with excellent credit fare the best with usually no fees
and a zero or low margin over the index. The advantage of the tiered
pricing is more loans can be approved using this method. But at what
cost to you, the borrower? Paying nine percent of what you borrow in
fees and a 5% margin over the index is not a great deal. If you find
yourself in a tiered pricing loan ask yourself if you can afford the
high margin over a 15 - 25 year period of time. It may be worth
thinking twice about borrowing that loan. If you cannot be approved
for a tiered pricing loan at the excellent credit level you may be
better off not applying for that loan.
14. Some loans have a co-signer release option. This means that the
co-signer can be released from the obligations of the loan after a
period of time and the student borrower will remain as the sole
signer on the loan. Be aware that to be able to release the
co-signer, you must make a certain number of on-time payments before
the lender will consider releasing the co-signer. Also, the student
borrower needs to prove that he or she is able to make payments on
the loan after the co-borrower is released. If this is an important
feature for you, inquire about the number of on-time loan payments
required to release the co-signer and how is the borrower determined
to be able to make payments after the co-signer is released.
15. Most loans have borrower benefits and payment incentives. Some
of these benefits have already been discussed above including the
grace period, deferment of monthly payments, and the co-signer
release. Payment incentives include interest rate reductions after a
certain number of on-time payments, and interest rate reductions for
automatic payments from a bank account. A word of caution about
incentives linked to making a number of on-time payments: only a
small number of borrowers actually benefit from this type of
incentive because there may be a late payment made along the way. To
safeguard against having late payments, ask what is the window of
time when a payment is considered to be on-time. For example, if the
payment is due on the 10th of the month, and the window is 10 days,
you have until the 20th to make the payment and still be considered
on-time. If the window is only 5 days, you need to make payments
sooner. To ensure that payments are made on time, ask about paying
the monthly bill using automatic payments from your bank account.
16. Be in touch with our loan counselor. Our loan counselor is
knowledgeable about loan options and about new trends in educational
financing and is a great resource for our families. |
