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 accessThe 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 loansThose 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."