Understanding Institutional Loans

For many students, financial aid is critical to financing their college education. The National Center for Education Statistics (NCES) reports that the typical first-time, full-time undergraduate student received $16,360 in average federal aid for the 2023-24 academic year.

However, that amount only goes so far. Financial support from loans like institutional loans, which are offered by schools, averaged $13,038.84 in 2023-24, according to data from the NCES. 

Institutional loans can be a useful option for students who need additional funding beyond other types of financial aid. But it’s important to understand how they work. Here’s what you need to know if you are considering an institutional loan.

What Is an Institutional Loan?

An institutional loan is a type of financial aid that’s an unsecured student loan. It may be offered by the school you’re attending, whether it’s a four-year public university, a private college, or a trade school that offers a certification program. However, not all schools offer institutional loans.

While many institutions design their loans for students, some schools also offer institutional loans for parents who want to borrow money for their child’s education.

The funds from an institutional loan can typically be applied directly toward your required enrollment costs, like tuition and fees. However, the rules vary between schools. 

Recommended: Guide to the Cost of College Over Time

Is An Institutional Loan Private or Federal?

There are both private and federal student loans. An institutional student loan is a non-federal education loan that falls under the “private loan” umbrella. 

Because these loans aren’t offered under a federal program, they’re not subject to the same standardized interest rates as federal loans, and they don’t come with the same repayment options. Loans from institutions also aren’t covered by federal benefits, like eligibility for income-driven repayment plans or student loan forgiveness.

Schools determine the eligibility requirements for institutional loans. That means they may be available to students with financial need, or they might be an option for any enrolled student or parent, regardless of need.

How Do Institutional Loans Work?

Once you’ve been accepted at a school and enrolled in a program, the school might offer you an institutional loan as part of your financial aid package. If they don’t, you may still be able to apply for an institutional loan. Always check with your specific school to see what they offer.

How Does Interest on Institutional Loans Work?

Interest rates vary for institutional loans. However, they generally have a fixed rate during which the interest capitalizes when the loan is in deferment while the student attends school. 

Some loan programs also charge origination fees that are automatically deducted from the disbursement of the loan. 

Recommended: Student Loan Deferment: What It Is and How to Defer Student Loans

How Do You Pay Back an Institutional Loan?

Institutional loans can have short- or long-term repayment periods. With short-term institutional loans, you borrow money for a few months at no interest or a low interest rate. However, this option typically requires paying off student loans before or at the start of the next term, giving you only a few months to repay the debt in full.  

Long-term institutional loans offer a repayment term that spans multiple years, closer to what you might get with a traditional private student loan. Some schools require payments to begin within days of disbursement, while other schools let students defer payments until six months after leaving school, much like federal loans.

Borrowers then repay long-term institutional loan principal, plus interest if applicable, based on the loan agreement they signed.

How Do Institutional Loans Differ From Other Private Loans?

Although institutional student loans are similar to private student loans, there are some differences. 

For instance, some institutional loans are designed with notably short repayment periods with little to no interest charged. This can help students secure their enrollment and chip away at their tuition for a semester at potentially no additional cost.

Furthermore, private loans require a credit check. Borrowers need to meet the lender’s credit requirements to get approved for a traditional private loan. Not all institutional loans do a credit check.

Getting an Institutional Student Loan

If you want to borrow an institutional loan, reach out to your school’s financial aid office. Some schools offer one or more loan programs, though you’ll need to meet the requirements, such as the minimum enrollment level and maintaining satisfactory academic achievement. 

Make sure you understand the terms of loan repayment. Calculating student loan interest on the loan is a good way to plan ahead for your installment payments.

Reasons to Consider an Institutional Loan

Although federal loans offer the most borrower protections and perks, institutional student loans can be a useful financial aid option, too. You might want to consider these loans if:

You’ve Reached Your Federal Loan Limit

The federal loan system sets limits on how much students are allowed to borrow per academic year and in total. 

For example, dependent first-year undergraduates have an annual loan limit of $5,500. And only $3,500 of that can be subsidized federal loans. The aggregate limit for federal student loans is $31,000 for dependent students — a threshold that some students can easily exceed if they’re attending an expensive school.

If you’ve maxed out your federal loan eligibility, an institutional loan could help.

You Don’t Qualify for Federal Student Loans

Another reason to consider institutional loans is if you aren’t eligible for federal student aid. Whether you’re an international student who doesn’t qualify for federal funding or you don’t fit the criteria for need-based aid, some schools offer institutional loans that might be more accessible.

You Don’t Qualify for Other Private Loans 

Private student loan lenders generally require borrowers to undergo a credit check and meet a minimum credit requirement. Those who need extra education loans, but don’t have strong credit, could potentially turn to institutional loans. Some schools don’t require a credit check for institutional loans. 

Pros and Cons of Institutional Loans

There are advantages and disadvantages to institutional loans. 

The Takeaway

Institutional loans can be a helpful option to fill the gap that other types of financial aid, like scholarships, grants, and federal student loans, can’t fill. However, make sure you shop around to find the best financing option for your education. If your school offers institutional loans, compare their features and repayment plan with other private loan alternatives. 

You might even want to refinance any private student loans you have, especially if you could qualify for a lower interest rate and potentially save money. Lantern makes it easier to explore your student loan refinancing options. With our online tool, you can compare offers from multiple lenders all at once to find the best refinancing rates and terms for your needs.