Thinking about paying for college is overwhelming for many people. Most need to take out loans, but how do those work? What are the options? You may find yourself being bombarded with flyers, letters and emails from different lenders asking you if you need additional money for college. If you’ve decided that you want to borrow money through a private lender, than it might help to know the types of loans that are out there so you can narrow down your search for what will work for you! In the world of private loans they fall under two distinct groups:
- School-channel
- Direct-to-consumer
School-Channel Private Loans
A school-channel private student loan works with you school after you apply for the loan. The school receives the information that you applied from the lender. The school then verifies that the amount you are requesting in private student loans does not exceed the Cost of Attendance. Remember, your Cost of Attendance is the total of both your direct and indirect costs for that school year and your total funding can’t exceed it. If you have grants, scholarships and/or federal student loans, all of that is counted in your funding. If your school sees that you are trying to borrow more than your Cost of Attendance will allow, they will often reach out to you so that valuable grants and scholarships aren’t lowered, but rather you can adjust the amount you are requesting in private student loans.
Once the amount has been verified the private lender will then finish processing your loan and send the amount you requested to the school. Any extra funds that were not needed to cover direct costs (tuition, dorm fees, meal plans) will then get sent to you to use for indirect costs (gas, school supplies, living expenses).
Direct to Consumer Loans
Direct-to-consumer private student loans do not deal with your school at all, hence the name. The funds that you apply for are sent directly to you without any contact with your school. Often they will advertise a faster, simpler application process with a faster turn-around time in getting your money, but this is often off-set with higher fees or interest rates.
Be Cautious
When comparing the two, the direct-to-consumer option may seem like an easier approach then the school-channel, but here are a few words of warning. If the school does find out that you borrowed a direct-to-consumer student loan, they are required to count that as a fund source and then will verify that you did not borrow more than your cost of attendance. 
If they find that you did, they are required to return any other types of your funds, which can include lower interest rate loans, college grants or scholarship awards! This then can also result in a bill to the student. Since they could not verify ahead of time and the direct-to-consumer loan went directly to you, they are left with no other option.
Many schools have warnings about direct-to-consumer student loans on their financial aid home page and many major lending institutions have gone away from the direct-to-consumer loan options and have stuck with only school-channel loans. These major lending institutions have made drastic changes over the years to encourage smart borrowing and help educate students in borrowing responsibly, but they can only do so much.
Make sure that you are thoroughly researching any type of loan that you decide to apply for! You are ultimately the person responsible for repaying the loan so the responsibility falls to you to make sure you are being wise in all your lending choices!
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