February 16, 2010
As larger banks pull out of the private student loan game, community banks and local credit unions are stepping up to the plate.
This fall, Washington, D.C.-based Independent Community Bankers of America will launch iHelp, a nationwide lending program that will allow students to apply for loans up to $10,000 per year through community financial institutions nationwide. As more small local institutions join the student loan game, college kids will have even more options for private loans. But know the pros and cons of banking small.
Lower limits, better access
The bad news is that local institutions may not have the same amount of capital as the big guys. The good news is that they're more willing to lend out what they do have.
"Smaller lending institutions don't usually have a larger coffer of money to lend out. (Their) student loans could cover the total cost of college or it could just be for a few thousand dollars," says Ruth Pusich, director of financial aid for Elmhurst College in Elmhurst, Ill. "The advantage to a smaller institution is that they tend give a lot of personal attention. If there are gray areas, they're usually more willing to work with you. The larger institutions just work by the book."
Pusich adds that "high-risk" students -- those with poor credit history, no co-signer or who attend unaccredited schools or institutions with high default and low graduation rates -- may find greater loan success through community banks and local credit unions. Whereas larger institutions frequently use a mathematical formula to determine loan eligibility, smaller ones often base loan eligibility more heavily on personal interviews and may offer a bit more sympathy.
Personal loans versus student loans
Those who opt for the community bank loan route should read the fine print carefully, says Kevin Moehn, CEO of Moehn and Associates in Vienna, Va., and a financial consultant for the iHelp program.
"Most (local) banks don't have the infrastructure to support an official student loan program," he says, adding that that might change once the iHelp program is in full swing. "Right now, a lot of them have the money, but will give you a personal loan for educational purposes instead of an official student loan."
The problem is that personal loans don't come with the same payback protections or borrower benefits as private student loans. While both loans accomplish the same goal of paying education expenses, student loans through big institutions such as Chase Bank and Wells Fargo come with certain borrower protections, including no prepayment penalties and the ability to postpone repayment while the student is still in school.
Pusich adds that student loans also prevent students from overborrowing. "A student loan is limited to the cost of attendance minus all other financial aid, so students only take on a manageable amount of debt," she says. "If a bank offers a student anything above the cost of attendance, that should absolutely be a red flag."
Different interest rates and borrower benefits
Kelly Tanabe, co-author of "1001 Ways to Pay for College," says that when it comes to choosing a loan, students should investigate borrower benefits in addition to interest rates and repayment terms.
"Private loans really vary a lot between institutions, but in general, smaller institutions, credit unions in particular, may offer a lower interest rate, but might not offer the same borrower incentives as larger banks," says Tanabe. "Students (who go to community institutions) could miss out on incentives like a lower interest rate after a certain payback period or a discount on fees if you pay by direct deposit. But if their interest rate is lower throughout the life of the loan, those things might not matter."
To compare apples to apples, Tanabe advises students to shop around and ask both large and small lenders for the total amount a loan will cost, including fees, interest and discounts.
First exhaust federal options
Before considering a private loan from a community institution or otherwise, Lauren Asher, president of the Institute for College Access and Success in Berkley, Calif., advises students to investigate their federal loan options, including Parent PLUS loans and loans offered through the college directly. Shop around to both large and small institutions before making a fiscal commitment.
"No matter where you go to find a loan, federal loans always offer better interest rates and borrower protections than private ones," she says adding that 64 percent of all undergrads with private loans take them on without maxing out the federal loans they're eligible for. "Regardless of who the lender is, private loans need to be evaluated individually and checked against offers from other banks. In the end, they should really be a last resort."