Private Alternative Loans (including Bar Study Loans)

Private Education Loans, also known as Alternative Education Loans, help bridge the gap between the actual cost of your education and the limited amount the government allows you to borrow in its programs. Private loans are offered by private lenders and there are no federal forms to complete. Eligibility for private student loans often depends on your credit score.

Some students turn to private education loans when the student doesn't qualify for federal loans either because of credit issues or lack of U.S. citizenship, permanent residency or other eligible non-citizen status. (Currently, students who do not have acceptable citizenship status need a co-signer or sponsor with eligible citizenship status to borrow.) Other students utilize private alternative loans to cover things like bar preparation course fees and living expenses between graduation and taking the bar exam.

Private education loans tend to cost more than the education loans offered by the federal government, but are less expensive than credit card debt. The federal education loans offer fixed interest rates that are lower than the variable rates offered by most private student loans. Federal education loans also offer better repayment and forgiveness options. Since federal education loans are less expensive and offer better terms than private student loans, student should exhaust their eligibility for federal student loans before resorting to private student loans.

Private student loans typically have variable interest rates, with the interest rate pegged to an index, such as LIBOR or Prime, plus a margin. The LIBOR index is the London Interbank Offered Rate and represents what it costs a lender to borrow money. The Prime Lending Rate is the interest rate lenders offer to their most creditworthy customers. At this writing, in November of 2011, both LIBOR and Prime rates are near or at historic lows. Thus, the margins tend to be significantly higher than in the past when the base rates were higher. As there are generally no interest rate caps on private loans, if LIBOR and Prime go back to pre-2008 levels, students may see a jump of somewhere between 4% and 8% in their interest rates. Prime historically tends to be higher than LIBOR, so if a student has a choice between LIBOR and Prime plus the same margin, the loan with the LIBOR rate will probably save them money over the life of the loan.

The interest rates and fees paid on a private student loan are based on the student's credit score and the credit score of the cosigner, if any. Generally, with a credit score of less than 650 to 700, a student is unlikely to be approved for a private student loan without a co-signer.

It is sometimes better to apply for a private student loan with a cosigner even if a student could qualify for the loan. Applying with a co-signer usually results in a slightly lower rate as such loans are not as risky for the lender. Moreover, the interest rates and fees are usually based on the higher of the two credit scores. If the co-signer has a much better credit score than the student, it could result in a much lower interest rate. Some lenders also allow the co-signer to be released from the loan contract after the student has made timely payments for two or more years and met additional credit requirements, such as working full time and keeping a good credit score and debt-to-income ratio.

UDM students who intend to borrow a private loan must complete a private loan application with the lender of their choice. Most lenders have online applications available. Once the student completes the application, if the lender approves the student to borrow the loan, the lender will forward the loan application to UDM for certification. In addition, borrowers requesting loans for in-school expenses (rather than Bar expenses) must complete a Private Education Loan Applicant Self-Certification Form for the lender.

Of course, Law students are encouraged to consider their borrowing options through the Graduate PLUS loan program before borrowing a private loan. Students may request consideration for expenses directly related to the Bar Exam (registration fees, fingerprinting, police reports, etc. but not bar review courses or living expenses) through the federal Stafford or Graduate PLUS loan program. It is strongly recommended that all students borrow conservatively, both for federal loans and private loans.

Students have the right to select any lender they wish for an alternative loan. Most lenders list loan terms and conditions on the internet. As always, UDM recommends that students review all options and make educated borrowing decisions.

UDM has partnered with ELMResources to assist with the lender selection process. ELMResources maintains a comprehensive although not exhaustive list of lenders offering private loans. Students may wish to use ELMSelect to begin the search for private loans. If a student selects a lender on the ELMResources list, the student can complete the application on ELMSelect. UDM will be notified of the request and will complete the school certification. Students who select a lender not on the ELMResources list should bring their application to the Financial Aid Office for manual certification.