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What Is an Institutional Loan?

ByChris Muller Updated on

Many families get shocked when they look up the sticker prices of colleges. Even though the tuition of these colleges may seem overwhelming, you can always opt for college financial aid to make your children’s higher education more affordable.

In fact, savings and income only represent a small portion of the resources most families set aside to pay for college expenses. According to a Sallie Mae/Ipsos survey in 2020 called ‘How America Pays for College’, grants and scholarships made up at least 25% of the costs of college from 2019 to 2020.

While private and federal student loans tend to get the most attention among parents trying to pay for college, there are some other options available as well. State-backed student loans, for example, are a popular alternative as well as, our agenda for the day – institutional loans.

So what are institutional loans?

The short answer

Institutional loans can be described as non-federal aid loans that are provided through a borrower’s school. The following are some other defining characteristics of institutional loans:

  • Institutional loans don’t have the same advantages as federal loans
  • The loan provider could also be the borrowers’ agency that is hired to service a loan
  • Interest rates and repayment options vary from school to school
  • Borrowers that opt for institutional loans should speak to their loan servicers or school to ask them about their loan options.

The long answer: What are institutional loans?

Institutional student loans are student loans that are made available via educational institutions such as universities or colleges. While some institutions may not offer these loans, the major of universities and colleges do as a method of helping students fill the gaps left behind by state and federal aid.

Since institutional loans aren’t mandated by state or federal law, each university and college that is offering these loans will have a lot of say for the loan terms, which includes maximum borrowing amounts, eligibility requirement, repayment options and interest rates. With that being said, students are usually required to complete a FAFSA application to qualify for institutional loans.

Approximately 70% of all undergraduate college students graduate with the burden of student loans. Besides the private, state, and federal student loans, many universities and colleges offer loans to aid students to pay their college tuition. Funds for such institutional loans come from the resources of the college, corporations, alumni, donors, foundations, and of course, the repayments from previous loan borrowers.

Every college loan fund has its own specific set of rules with regards to the loan amount, eligibility requirements, and repayment conditions. In some cases, schools also offer competitive deferment provisions and interest rates as compared to private and federal student loans.

For instance, many private Southern California colleges offer high school graduates interest-free loans for specific geographic locations in the state. Recipients of funds get determined by the college campus, have no insurance or origination fees, get subsidized by each respective college, and allow college students 10 years to repay the borrowed amount.

In addition, there are many cases where the repayment of institutional loans is deferred (also interest-free) in the case of graduate study or employment of post-graduates into certain occupations.

There are also some cases where institutional loans from colleges are offered to students regardless of their parents’ eligibility for federal financial aid or federal loans.

Since the eligibility criteria for each school is different, borrowers and their families are commonly encouraged to check with their respective university or college plan to learn more about the availability and possibility of institutional loan funds.

As is the case with all kinds of consumer debts, the borrower should be very careful while reviewing the student loan’s terms and conditions and whether the funds are being derived from private, state, federal, or college sources.

Interest rates on institutional student loans

Each individual university or college that offers institutional loans has enough power to charge an interest rate of their choosing. Oftentimes, these interest rates may be low, or at least lower than the rates set by federal student loans. Also, their interest rates may be both – variable or fixed in nature.

Oftentimes there are cases where the interest rates are subsidized if the student is enrolled in a class and only starts getting accrued when the student leaves school. In contrast, the interest rates for federal student loans are typically controlled by Congress whereas the interest rates for loans from the state are controlled by private lenders and the interest rates for state loans are controlled by the state’s legislature.

Before you agree to the terms of your loan, you should understand them first, which includes the interest rate and how it will accrue.

Eligibility of institutional students loans

Each university or college that offers institutional loans can set up its own requirements for eligibility. Some institutions have also made these loans available on the basis of the students’ financial requirements. Other institutions have only made loans available to students from particular regions and perhaps even to those who enroll themselves in certain programs.

The most common eligibility requirement between most institutions is that the borrowers will need to be enrolled in a particular institution. If you’re searching for a financial aid office yourself, it is recommended that you check whether your school offers these institutional loans. If they do, you should check whether you fulfill all the requirements to borrow.

Grants versus institutional loans

Institutional loans, as their name suggests, are loans. This also means that they need to be repaid, and usually with interest, unless they are forgiven.

On the other hand, grants are free money and they are provided to students to help them enroll in their choice of college. Typically, grants don’t need to be repaid and they are offered in many different forms. The most common grants include institutional grants, state grants, and federal grants.

Scholarships versus institutional loans

Scholarships are very different from grants and can be described as free money for education being offered to some students. It’s pretty obvious that scholarships shouldn’t be repaid. In contrast, institutional student loans are a kind of debt that should be repaid and are typically repaid with interest.

How to apply for institutional loans

Commonly, most colleges and universities require you to fill in a free application for the Federal Student Aid (FAFSA) before you can apply for institutional loans or any other form of financial aid that may be available.

If you’d like to learn some more about the different kinds of institutional loans available in the school of your choice we recommend that you check at your financial aid office.

Alternatives to institutional loans

If anyone is considering paying for college, they should first begin by completing the free application provided by Federal Student Aid (FAFSA). In doing so, you will be able to understand which kinds of state and federal aid you qualify for, which includes federal student loans. These loans come with one of the most beneficial terms and lowest interest rates you will find out there.

If these federal student loans aren’t able to cover all of the educational costs you’re going to incur, you should then consider state-mandated student loans that you qualify for. These loans are also offered with lower interest rates as compared to private loans.

If you still require funds after these, then you can finally turn to private student loans to fill the gap. However, you will find that these kinds of loans are a little more expensive and they offer fewer protections as compared to other forms of financial aid.

Naturally, all the sources of free financial aid, such as scholarships and grants should be considered before you start considering borrowing student loans.

Long-term vs. Short-term institutional loans

Typically, the annual interest rate for long-term institutional loans stands somewhere between 3 and 10% and their loan repayment terms start when the grace period comes to end. The grace period is nothing more than the predetermined period when you have to start repaying your loan and it usually starts when your enrollment is under half-time.

On the other hand, short-term institutional loans have monthly interest rates that are typically closer to 1%. Also, their loan repayment period is generally owed around the first week of the borrowers’ final semester. This is also why short-term institutional loans don’t have a grace period, although you should make it a habit to have a look at the promissory note to be absolutely sure.

Final thoughts

Now that you know almost everything there is to know about institutional loans, it is time that you visit your university or college’s financial aid office and start asking all the right questions. The financial aid office will offer you a list of student loan programs as well as all the details needed to obtain each loan.

Chris is a noted financial expert and co-founder of FullPocket. Chris has a BBA and MBA in Finance with an emphasis on advanced investment theory. He's spent the better half of his working career in finance, too. In 2015 Chris met co-founder David Weliver, who introduced him to the industry and he has since been able to share his expertise with fellow millennials on investing, making money, saving money among many others topics.