It seems like all of the hubub in congress over lender deals and inappropriate relationships with schools has had a great deal of impact in the educational finance market; unfortunately, its not all positive. I'm sure you've noticed the proliferation of TV, radio and print ads from banks, credit unions and other lenders touting private/alternative student loans. Each day it seems like I'm hit with at least 20 ads of some kind from lenders offering "up to $40,000 a year" for higher education. Though these offers sound great up front (you don't even need to have your college certify that you really need the money), you don't really have any sort of clue about what you're getting into. How can you weed out the good from the not so good (or bad even)? Here's how to dig down and find out the truth about your private/alternative loan prospects.

First, anyone who promises you $40,000--no questions asked, just show proof of employment, no payment needed until you graduate--likely has something they're trying very hard not to tell you. The things lenders are most likely not to share with you prior to your going through the "pre-approval" process are (1) the actual interest rate they're going to charge you and (2) the amount of the fee they're going to charge you to take out the loan. They may have some "good reason" for doing this--perhaps they have sliding scale fees and tiered interest rates--but you want to know, in solid black and white, on paper, in writing, exactly what your interest rates are (over the life of the loan) and what sort of fees the lender is going to charge you. If the lender doesn't want to share this information with you, you might want to look at applying with someone else.

Second, smart lenders want you to borrow only what you need and only what you can afford to pay. Lenders are in the business to prosper, not to sink. If they're not verifying that you have an actual, legitimate need for the money you want to borrow (by having the college you attend certify your costs and your actual enrollment at the college) and if they're not overly concerned with whether you can actually repay the loan (a strong sign of this is if they allow you to borrow the maximum without too many questions), something's a little off somewhere. How are they making money? Through the fees they charge you for originating the loan? Are they selling the loan to someone else after they pay it out so that they don't have worry about slow pays, no pays and defaults? What's the catch? If they can't give you specifics on how your loan is managed from origination to termination, then you might want to look at another lender.

Third, what are the rules? How many hours do you have to take, how many credits do you need to maintain, in order to not have to start making payments? When does repayment really begin? Is there any opportunity for deferment or forbearance? If you stop out or drop out of school, how long do you have until you have to make a payment? Are there penalties for late payments? Will the lender go after your cosigner if the student doesn't pay? Get this information in clear, precise writing ASAP! If the details are murky, look elsewhere.

Fourth, many of the educational lenders you see ads for promise students discounts on interest rates or payments if they make their payments on time. How many students taking out these loans actually qualify for these discounts? If a student does qualify for the discount, what happens later if a borrower misses a payment? Is the discount lost forever or are there any opportunities to regain the discount? If they can't tell you, move on.

Fifth, and finally, you want to know exactly what will happen if you can't or don't make your payments on these loans. Private/alternative loans are not like federal Stafford, PLUS or Perkins loans. You don't typically have the same sort of protections afforded to borrowers of federal funds. If you can't make payments on a private/alternative loan, your lender might work with you; but they're not required to do so. If you don't make payments or if you default on a private/alternative loan, a consumer account, then the lender can pursue collections or other legal means to collect the consumer debt (in some states, this can have a serious impact on your personal finances and security).

Think before you borrow. Ask questions. Borrow responsibly. If you're not certain about whether you should pursue a private/alternative loan, STOP! Visit the financial aid office on your college campus and explore your options. In my opinion, private/alternative loans should be the financing option of last resprt. Exhaust all other options first.

If you'd like to get a head start on financing college, check out Financial Game Plan for College Students, from Topaz Consulting LLC. Its a great primer for students and parents who have little to no experience with higher education financing.

Until next time!

Lynn Byrne

Preparing for college admissions? Trying to find direction? Need a little help with the planning? Check out my college planning series:

• College Planning Made Easy--the planning and preparation workbook for the take charge, college-bound student,
  
• Paying for College Made Easy--a college financing guide designed to assist students and families in preparing and planning for higher education expenses; and
  
• The Great Scholarship Search--my guide for students and parents researching and applying for scholarship funding.