If private student loans without cosigners have ceased to exist because of the credit crunch in the United States, private uncertified student loans are now “endangered” and may similarly be on their way to “extinction.”
Uncertified Student Loans, known in banking circles as direct to consumer student loans, are private student advances that don’t have to be cleared and verified by your college in order for you to get bank approval.
If you’ve been to a bank or private lending company lately to apply for private student loan, chances are you were required by the loan officer to secure a certification from your college that the loan amount is not in excess of your cost of attendance less any federally backed financial assistance that is in place for you.
Once you have this document, issued specifically in your name, you become a certified student loan applicant. The certification from an authorized college official is the first major step in the process of applying for a private student loan. You still have to fill up a form, come in for an interview to be conducted by a loan officer, submit all the required documents, and name a cosigner beside your own signature.
Before the credit crunch, there was no such thing as “certified” or “uncertified.” Your only choices or options for funding assistance to get through college where a federal loan or a private student loan.
As you probably have already known, a federal loan is a low-interest, non-profit credit facility provided by the government to students, based on a student’s economic circumstances. A private student loan, on the other hand, is a facility provided by banks and other loan companies based on your credit worthiness, or your ability to pay back the loan amount.
Most students apply for federal-funded loans, but government funds are generally not enough to cover all their expenses. To supplement federal loans, you will have to turn to private student loans to cover these other costs.
Since a private student loans are based on creditworthiness of the loan applicant and his cosigner, many students took advantage of the situation in the past by borrowing more than their college needs to spend for other non-academic expenses, such as car repairs for instance. Most banks tolerated this practice as it meant added profits for them in terms of revenues from interest and other charges.
Credit Crunch
The financial crisis of the late 2000s wrought havoc not just on Wall Street, but across many homes in the United States. Students were also affected by the crisis, described by economists to have been triggered “by high risk financial products and failure of banking regulations.”
Many graduates defaulted on their student loans as the crisis took a toll on their lives with massive job retrenchments, high unemployment rates and shrinking job opportunities, jacked up fuel prices, higher interest charges, etc. With too many loan defaults, banks have been forced to institute new reforms designed to plug the holes in their system.
With private student loans and credit card loans almost running side by side in terms of volume of transactions, banks had to act swiftly to stop the hemorrhage. They now require student loan applicants to have a cosigner or guarantor with good credit history for their loans. Moreover, they prefer certified student loan applications over uncertified ones, to minimize loan exposure and risk. In fact, very few loan providers entertain uncertified student loan applicants.
Students Prefer Uncertified Loans
While more students are seeking uncertified loans because of less restrictions, very few banks and private lenders are willing to accommodate this type of loan.
In view of the nature of student loans, private lenders are unable to collect repayments until after four years or about six months after graduation. Moreover, bank funds are more exposed to risks as what happened soon after the subprime-triggered financial meltdown when a great number of students defaulted on their loans, adversely affecting many financial institutions across the United States.
If they can have their way, many students would prefer to be uncertified than certified. After all, being certified limits your loan entitlement, while being uncertified does not. The other perceived advantages of an uncertified student loan from the point of view of its beneficiaries follow:
- It gives the student the liberty to seek additional funds in the form of a private student loan as long creditworthiness is established or someone is willing to cosign along with the borrower.
- It is directly released to the student and allows for a broader range of uses for the loan.
- It requires no monitoring by the college and no quarterly validation.
- You can obtain the entire amount of the loan without delay.
Most colleges treat their list of certified students like their list for federally-funded students. They are bundled in a database that can be easily accessed by qualified lenders and other schools. Using this database, accredited lenders can monitor your status each step of the way to verify your enrollment status and to ensure that loan funds are used only for educational purposes.
Since funds are directly released to the school, hardly any amount is left after tuition and other school fees. The little extra leftover is turned over to the student for other fees, books, and supplies. It is not surprising, therefore, that students prefer unregistered over registered, if they can have their way.
Discipline Required
Unregistered student loans provide the flexibility students need to manage their own funds and have some extra for other school-related expenses.
But while there are students who diligently and wisely manage their funds to cover all their school expenses, there are also others who misuse funds for purposes other than college education, like car accessories or repairs and other totally non-academic expenses.
The misuse of loan funds spells trouble It will have a bearing on your graduation and can affect your future altogether, with unpaid loans haunting you as you start off in your career, if you can still manage to have one.
Private uncertified student loans have many advantages over private registered student loans, but they can also be trouble in the hands of an undisciplined student with a shortsighted view of the future.
If you’re not prepared to handle your funds, then it’s a good idea to be certified to ensure that your hard-to-find funds for education are used the way they should be – an investment for your future, not an expense today. It’s a once in a lifetime opportunity that may not repeat itself.
Applying for Uncertified Student Loans
You can apply for an uncertified student loan even without your college knowing it. This is also one of its advantages, if you’re a private person and wish to keep things to yourself. Aside from tuition, your uncertified student loan can also cover other college expenses, such as textbooks and laptops.
Since grants and scholarships are often hard to come by and federal loans offer limited loanable funds and are subject to numerous restrictions, uncertified private student loans provide an alternative to cover other educational expenses such as books, dorm, and cafeteria.
Unfortunately, this type of loan is not easy to come by and is based solely on creditworthiness. As such, it requires an excellent credit history or a cosigner with good credit ratings. While there is no limit for this type of loan, it’s a good idea to borrow a reasonable amount that you can pay in a timely manner during the repayment period, usually after graduation.
Interest rates for student loans are generally higher than usual. Even when taking out a loan, you need to do it with the future in mind. Paying for this loan will be part of your credit history and will be considered by credit evaluators in determining your credit rating in the future.
An excellent credit rating opens the door to many exciting possibilities for you once you’ve graduated from college. For one, it will open new loan facilities at lower rates, which could serve as your seed fund in building up your career or opening a new business.
Recommendation
Given the above considerations, the choice between a certified loan and an uncertified loan may not be an issue for you anymore given the reluctance of many banks and other private loan providers to entertain uncertified loans.
With the recent decision of the government to increase the amount of federal-funded loans, a choice or a mix of federal funded loan and private certified student loan is not a bad idea at all.
The mix should be employed if – and only if – federal loans, grants, and other types of financial assistance are not sufficient to cover the full cost of college education.
There are more financial opportunities available to you after graduation. It’s a good idea to use your student loan – certified or uncertified, federal-funded or privately funded — solely as your investment in higher education, towards brighter career prospects.
A good rule of thumb would be: don’t take out an educational loan to spend on anything else other than your education. You can fix or buy a new car, dine and wine in classy restaurants, build your own home, travel abroad, etc. when gainfully employed after graduation, when you begin to reap the well-earned and deserved dividends of your academic investment and hard work.
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