One of the beefs I have with my own industry is some of the silly terminology we’ve come up with. My least favorite example is how private student loans – education loans from non-governmental sources – are sometimes referred to as “alternative loans.” This term is misleading and could result in costly mistakes for borrowers.

“Alternative” implies that it’s the type of loan you take out in place of another. There’s plenty of evidence to suggest that many borrowers take out private loans as an alternative to federal student loans. Ouch. The most common type of federal student loans – the Stafford loan – currently features a fixed interest rate of 6.80%. Borrowers can even find lenders who will reduce this rate even more through various incentives. You’d be hard-pressed to find a private education loan for a 6.80% variable rate, let alone a fixed one. (“Fixed” means the interest rate stays the same for the life of the loan. “Variable” means the interest rate can change periodically, depending on the index on which the rate is based.) Federal loans have more liberal and lenient repayment, deferment and forbearance provisions than private loans. No matter how you look at it, if you’re a student who has to borrow, federal loans need no alternative.

If we need another term for private loan it should be “supplemental.” Private loans should only be used if the student and/or parent needs to supplement their federal loan borrowing. Stafford loans are only available in limited amounts each year, so supplemental borrowing is a reality for many. Even then, if a parent is willing to borrow, the federal PLUS loan, with a fixed interest rate currently of 8.5%, might be the better source of funds than a private loan.