The Argument against Using Alternative Loans to Pay for College

Using alternative loans to pay for college is a step that many students take at some point. Instead of using federal loans, they branch out and look for other options. While they can be beneficial in certain situations, there are some disadvantages as well. Here are a few reasons that you may not want to consider using alternative loans for college.

Higher Interest Rates

One of the biggest problems with using alternative loans to pay for college is that they usually charge higher interest rates. Alternative loans are typically offered by institutions and private lenders. Their main objective is to make as much money as possible. Getting federal student loans, you can usually secure a lower interest rate because the loans are often subsidized by the federal government. Their main objective is to provide the opportunity for an education, instead of making a profit on each loan.

When you consider the impact that a higher interest rate has on your financial situation, the results could be staggering. Many people pay for their student loans over the course of 20 or 30 years. Even a fraction of a percentage point higher in interest could result in thousands of dollars in extra fees that you have to pay. In addition to that, your monthly payment will be substantially higher than what it could be otherwise. This provides you with less flexibility on a month-to-month basis and makes your life more difficult.

Lender Practices

Something else that you want to consider in this regard are the lender practices involved. When you use a federal student loan, you can feel somewhat confident that you will be treated fairly. The lenders are backed by the federal government and therefore have to meet certain criteria in order to remain in good standing with the government. They have rules to follow, and all of the lending practices will be the same.

With private lenders, they are often not under the same scrutiny that other lenders are. They can make up their own rules, and there may not be much that you can do about it.

Payment Flexibility

One big advantage of using federal student loans is the payment flexibility that they provide. With a federal student loan, you can defer your payments until after you graduate from college. If you have a subsidized loan, the government will even pay your interest for you while you are in school. With private lenders, this is often not an option. Therefore, you will be forced to get a job and make interest payments while you are attending class. This can often put an unnecessary strain on you and decrease your learning capability while you are in school.

After you graduate, federal student loans also have a variety of payment plans, such as the graduated payment plan, or income-based repayment. Private lenders may not have these options available.

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