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Institutional loans are a type of non-federal student loan offered by educational institutions, including colleges and universities. They're technically considered private student loans but differ in many ways from traditional private loans.
If you don't qualify for federal financial aid, you've maxed out your federal student loan allotment for the term or you simply want to avoid long-term student debt, here's what you should know about institutional loans.
What Is an Institutional Loan?
Institutional loans are student loans offered by the borrower's college or university. They can have short or long repayment terms, with terms varying from school to school.
Because they're a form of non-federal financial aid, institutional loans don't offer the same benefits as federal loans, including access to forgiveness programs, income-driven repayment plans and generous deferment and forbearance options.
However, they also don't necessarily fit in the same category as traditional private student loans. For starters, some schools may not require a credit check when you apply. Also, some colleges may offer short-term loans that charge little or no interest but require repayment within a few months.
How Do Institutional Loans Work?
Institutional loan terms and how they work will vary depending on the educational institution. In general, however, colleges may offer either short-term loans, long-term loans or both to their students. They're often designed to be used only for tuition and fees.
Short-Term Loans
Short-term loans typically come with a low interest rate—as low as 1%—or even no interest rate at all, and you'll typically need to repay them with one payment by a specified date, usually within a few months.
If a college doesn't charge interest, it may opt for a small processing fee instead. It may also choose to charge interest if you don't pay back the debt on time.
While some schools may require a credit check, that's not always the case. Colleges may also have other requirements for these loans, such as a minimum GPA, half-time enrollment and more.
Long-Term Loans
Long-term institutional loans can come with repayment terms as long as 10 years, depending on the school. However, payments are usually deferred while you're still in school. Interest rates range from 3% to 10% in most cases and will typically depend on your creditworthiness.
Depending on the college, you may also be required to be in a certain program, maintain half-time enrollment and more.
Are Institutional Loans a Replacement for Federal Student Loans?
Depending on your situation, an institutional loan can be used to supplement your federal financial aid, or it can be used to avoid the long repayment terms of federal and private student loans.
For example, if you need money for the upcoming semester but expect to have money to pay off a loan in the next few months, a short-term institutional loan could be much cheaper than a federal loan with a 10-year repayment term.
However, it's important to remember that some schools may require a credit check, which isn't a stipulation with most federal loan programs, and you won't be eligible for federal loan benefits. What's more, long-term institutional loans can come with higher interest rates than federal loans.
So, unless you can easily pay back a short-term loan or you don't qualify for federal financial aid, it may be best to stick with federal loans before you take out a loan directly from your school. Some colleges may even require you to exhaust your federal loan eligibility before you can apply for institutional loans.
Pros and Cons of Institutional Loans
As with any type of student loan, there are benefits and drawbacks to consider with institutional loans before you apply.
Pros of Using Institutional Loans
- May not require a credit check: Depending on your school, you may be able to get approved without undergoing a credit check, which can be helpful if you haven't had the chance to build your credit history.
- Can be inexpensive: If you can manage to pay back a short-term loan, you may end up paying very little in terms of interest and fees. Even some long-term institutional loans can come with lower interest rates compared to traditional private student loans.
- May not require federal financial aid eligibility: Again, requirements can vary by school, but you may not need to be eligible to receive federal student aid to get approved for an institutional loan.
Cons of Using Institutional Loans
- No federal loan benefits: You won't be able to qualify for loan forgiveness programs, income-driven repayment plans or any of the other benefits offered to federal student loan borrowers. And if you miss just one payment, some schools may put your account in default immediately.
- No guarantee of approval: Each college has its own set of criteria for approval, and even if there's no credit check, you may be denied based on other requirements.
- Can be expensive: Long-term institutional loans can carry rates as high as 10%, which is much higher than federal loan interest rates and also higher than what some private lenders charge. Even with short-term loans, your interest rate can be high if you don't pay back the debt by the initial due date.
Work to Build Your Credit to Improve Your Borrowing Options
Borrowing money as a college student can be difficult, especially if federal financial aid isn't enough to meet your needs. While it may not help immediately, taking the time to build your credit history can help you expand your options in the future when you need to borrow again.
Experian Go™ is a free service that can help you get started by providing you with access to your Experian credit report and FICO® Score☉ , as well as resources and insights to help you get started on your credit journey.