Alternative Loan and Money Management Tutorial

Choosing to borrow an Alternative Loan is a very important decision. Therefore, it is essential that you research all potential financing options, including any loan programs that you are considering. In order to assist you in this process, the Finance Authority of Maine (FAME) has created the following on-line Alternative Loan & Money Management tutorial. We strongly encourage all students who wish to borrow an Alternative Loan to complete this on-line session.

During this tutorial, you will be provided with important information regarding budgeting, debt management, financing options and understanding your credit score. There will also be a quiz, which will give you an opportunity to review the information that we have covered.

Borrowing an Alternative Loan will have a significant impact on your overall educational loan debt, therefore it is important for you to remain well-informed throughout the process.

• Topic 1 of 10: How much can I afford to borrow?
• Topic 2 of 10: Should You Borrow an Alternative Loan?
• Topic 3 of 10: What is an Alternative Loan?
• Topic 4 of 10: Other Options
• Topic 5 of 10: Establish a Budget
• Topic 6 of 10: Reduce Your Expenses
• Topic 7 of 10: Application Process
• Topic 8 of 10: Know Your Credit Score
• Topic 9 of 10: Repayment: LOANS MUST BE REPAID!!
• Topic 10 of 10: A Word About Credit Cards

The following debt/salary wizard has been created to allow you to do a "what-if" analysis with varying debt levels and interest rates to determine the salary needed to support this debt. This interactive calculator will help you determine:

• what your monthly payment will be,
• how much salary is needed to make the payments on current and future student loan debt, and
• how much can be borrowed based on future expected earnings.

To utilize the debt/salary wizard, enter the salary you anticipate earning upon graduation. The calculator will calculate the maximum amount of student loan debt you should borrow. If you enter the current amount borrowed in student loans and the amount you anticipate borrowing throughout your college career, the calculator will return the monthly payment and salary required to make payments on this debt.

Note: These calculations are based on the financial aid industry recommendation that student loan debt not exceed 8 percent of your gross earnings. The calculations do not take into consideration a high amount of credit card or other debt.

Before borrowing any loan, it is important that you first exhaust all other financing options.  Choosing to borrow a loan is a long-term commitment that will impact your future financial plans.  Your ability to purchase a car, or a home, will greatly depend upon the borrowing choices that you make today.  It is important that you research all potential loan programs and lenders before you choose to borrow. 

ALWAYS borrow conservatively!!  Borrowing an Alternative Loan should only be considered as a last resort, after you have researched and considered all other options.  Recent studies have shown that many students are borrowing Alternative Loans unnecessarily, often before they have accessed other more affordable financing options.  This unnecessary borrowing is usually the result of confusion and a lack of information. 

Also referred to as "Private Loans," Alternative Loans are credit-based loans offered by private lenders either as an alternative to, or in addition to federal loans. Alternative Loans are one way to provide additional resources to close the gap between federal and state financial aid resources and actual college costs. Students and parents can apply for an Alternative Loan to cover the total cost of attendance minus any other financial aid, the total of which cannot exceed the cost of attendance at your school. Some lenders even offer Alternative Loans to pay past due balances.

It is important to remember that Alternative Loans are NOT the same as federal loans and are typically more expensive.  Alternative Loans do not have the same terms and benefits as federal loans and often carry higher interest rates and fees.  Because these loans are offered through private lenders, the terms and interest rates can be as varied as the lending institutions that offer them. Interest rate and fees are often based on the credit rating of the borrower and/or co-borrower.

It is important that you explore all other possible financing options before applying for an Alternative Loan. In general, these should only be used as a loan of last resort.

While some Alternative Loans have similar features of the Federal Stafford Loan, others do not. The terms and interest rates of these loans vary based on the lender and program that you choose.  Therefore, it is important to carefully review the terms of the loan that you are considering. Ask yourself these important questions:

• What fees are charged and how are they calculated? When and how are fees paid?
• What is the interest rate? Is it fixed or variable?
• When does payment begin? Can payments be deferred?
• What is the total cost of the loan over the life of the loan?
• Is a co-signer required?
• Is the interest capitalized and if so, when?

The most important question to ask yourself: Have I considered all other options?

Before you borrow an Alternative Loan, it is important that you explore all other possible resources and financing options. Although you do not need to apply for federal or state financial aid assistance before applying for an Alternative Loan, we strongly encourage you to do so, as you may be eligible for grants, Federal Work-Study and at a minimum, a lower cost Federal Stafford Loan. 

There are many types of financial aid and you should become familiar with them.  It is important that you apply for financial aid each year in accordance with your school's filing deadline.  Due to the fact that financial aid funds are limited, many students find themselves borrowing Alternative Loans because they have missed their school's financial aid deadline. 

The financial aid office at your school is an important resource for information regarding financing options.  They will be able to provide you with specific information regarding your financial aid options and the financial aid process.  In order to be considered for all types of financial aid, you must complete the Free Application for Federal Student Aid (FAFSA).  For more information and to complete the FAFSA on-line, go to:

www.fafsa.ed.gov

It is important that you borrow your Federal Stafford Loan before you borrow an Alternative Loan.  If you are unsure as to whether or not you have applied for your Federal Stafford Loan, you should contact the financial aid office at your school.  Many students choose not to borrow their Stafford Loan due to the fact that their annual Stafford Loan award is typically not high enough to pay their bill.  Because an Alternative Loan is a more costly option, we strongly recommend that you borrow the Stafford Loan first, and then borrow an Alternative Loan to cover the rest of your bill.

Other possible financing options to consider are:

• employment during the school year and during the summer,
• outside scholarships,
• payment plans, and
• Federal PLUS Loans for Parents.

We recommend you contact the financial aid office at your school to ensure you have explored all your options.

Being in control of your finances requires maturity, discipline, persistence, and a clear understanding of "wants" vs. "needs." You must first determine what is most important to you and set goals. Having a clear understanding of what is most important to you will allow you to establish a realistic budget that you can stick to. In order to establish a budget, you will need to do the following:

• Determine your income
• Determine your expenses
• Create a spending plan
• Keep track of your expenses
• Periodically evaluate your spending plan

Income
Monthly Gross Earnings
Subtract 28% for average withholdings
Monthly net income

Expenses
Housing		Grocery Items
Utilities		Savings
Medical Insurance		Clothing
Student Loans		Other Credit
Misc. Expenses		Entertainment
Transportation Expenses		Child Care
		Monthly expenses
		Annual expenses

Results
Monthly net income		Monthly discretionary income
Subtract monthly expenses		Annual discretionary income

There are some additional things to consider when developing a budget:

• What are my basic expenses?
• How can I reduce my expenses?
• How much debt am I willing and able to assume?
• What will my salary be after graduation?
• How much have I already borrowed?
• Will my estimated loan payments be affordable, based on my career choice and income potential?
• Should I consider part-time work?
• How can I reduce my costs?

After you have developed a budget, you will need to think carefully about whether or not there are any expenses you could control.  Here are some examples:

• Personal expenses and discretionary spending, such as clothing, entertainment, cell phone, midnight pizza, etc.
• Transportation expenses (if you live on campus, you may want to forego the expense of a car, as you can walk to all of your classes)
• The cost of living (a single room vs. the double occupancy rate)

The best way to keep control of your finances is to plan ahead. Remember that loans have to be paid back. Borrow conservatively and only in the amount you need.

You should:

• know the difference between your wants and your needs, 
• try to keep your expenses as low as possible,
• set spending limits and stick to them (resist the urge to spend when you have a lot of money (for example, at the start of the semester when you receive a credit refund check and you have more money on hand than usual)),
• periodically review your fixed and variable expenses (don't assume fixed expenses can't be adjusted), and
• write down your goals--short, medium, and long term. 

Because Alternative Loans require a credit review, your school might suggest you seek pre-approval for an Alternative Loan.  The certification process varies from school to school, so it is important that you understand the process at your school.  We recommend that you contact the financial aid office at your school for more information.

Before any loan is made and any funds can be disbursed to your school, you must complete and sign a Promissory Note, including, if required, co-borrower information and signatures. Most lenders require that you complete a promissory note each time you borrow.  The promissory note authorizes your school to deposit funds to your student account and is the legal document that evidences your agreement to the terms of the loan and your promise to repay the loan.

When you apply for an Alternative Loan, lenders generally rely in part on your credit score and/or the credit score of your co-borrower to determine whether or not you are eligible for an Alternative Loan. While your credit score is not the only factor lenders use to make decisions, it is often a key factor in whether or not you are approved. The most widely used credit scores are the FICO scores. Your credit score may influence the credit, guarantee, or origination fees you may be required to pay and often the interest rate that is available to you, so it is important that you know and understand your credit score. You should review your credit report once a year to make sure it is accurate.  Here are some other things for you to consider:

• A student or parent initiated Alternative Loan pre-approval inquiry may reduce your credit score by approximately 5 points each time you apply for credit (depending on the length of time between pre-approval attempts).
• Applying for pre-approval through several lenders may impact your ability to obtain future credit.
• Some lenders base their interest rate and/or fees on your credit score, the lower the score, the higher the interest rate and/or fees.
• A late payment will remain on your credit report for seven years.
• Insufficient credit history may result in the denial of an Alternative Loan.

For more information regarding credit scoring and to request a copy of your credit report, go to www.annualcreditreport.com

If you use an Alternative Loan to finance your education, it may result in a significant increase in your monthly loan payments once you enter repayment. While many lenders offer in-school deferments and a six-month grace period before requiring payment on an Alternative Loan, it is important to remember that unlike a Federal Subsidized Stafford Loan, these loans accrue interest both while you are in school taking classes and during your grace period. If possible, interest payments should be made while you are in school to avoid having interest added to the total amount of your loan once you enter repayment. These interest payments are often minimal and paying them upfront will reduce the total overall cost of your loan.

To obtain more information regarding your federal student loans, interest rates, and other information, the following resources are available:

National Student Loan Data System (requires your FAFSA PIN)
National Student Clearinghouse

Important reminders about repayment

• Alternative Loans cannot be consolidated into a Federal Consolidation Loan.
• Alternative Loans are not discharged due to disability or death.
• The amount of loan that you borrow now will directly impact the amount of monthly income that you will have available for living expenses once you graduate.
• While many Alternative Loans offer extended repayment terms (10-25 years), choosing an extended repayment term results in paying more interest over the life of the loan.
• Inform your school and lender of changes in your name, mailing address, telephone, or Social Security number so that all correspondence is promptly directed to you.
• Read and keep all documents you receive pertaining to your student loan and be sure to understand your loan amount and the payments that will be required.

Use your credit cards wisely to help you establish a solid credit rating and avoid financial problems. Every time you use your credit card, you are borrowing money. If you don't pay off your balance each month, you will have to pay a finance charge.
When selecting a credit card, you should shop around for the best deal, based on your budget and repayment habits. Look for the following characteristics:

• A low annual percentage rate. (Watch out for low introductory rates that are raised after a year or less.)
• The interest calculation method (This affects how much interest you pay, even when the APR is identical.)
• Low or no annual fees
• A grace period (This may only apply if you pay off the balance each month. It may not apply if you carry a balance or take a cash advance.)
• The credit limit (It may be a good idea to start small--say around $500-$1,500.)
• Services and features, such as cash rebates, frequent flyer miles, extended warrantees, etc. (While they may appear to be a good deal on the surface, they may be difficult to earn and redeem. Evaluate these offers in terms of their value to you, and any extra credit costs you may incur.)

Keep copies of all of your credit card records and receipts to compare to your monthly statements. Follow up on any errors. Shred or otherwise destroy carbons and receipts before throwing them away.

It's important to understand the types of loans available, the terms of each loan, and your responsibility for repaying the loans. Take note of your rights and responsibilities listed on the confirmation page, provided at the end of this loan counseling session. Your loan application and promissory note also contains your Rights and Responsibilities.

You must repay your loans, even if you:

• do not complete your education;
• are not employed upon completion of your studies;
• feel that the education you received did not meet your expectations.

It is important that you stay in touch with your lender:

• You must tell your lender of changes to your name, address, telephone number, enrollment status, school and employment status
• THE MOST IMPORTANT REASON FOR STAYING IN CONTACT WITH YOUR LENDER: If you are having difficulties making your student loan payments, there are options to help you, such as deferment, forbearance, or an alternate repayment schedule.

You may reduce or cancel your loan at any time before you receive the loan funds.

Try to pay the interest on your loan while in school to avoid a higher principal balance once you enter repayment.