Student loan borrowers are overwhelmed, and for a good reason. College costs make it seem almost impossible to avoid borrowing tens of thousands of dollars in student loans. Depending on your repayment term, you could pay thousands in extra interest charges on top of your loan balance.
Interest-free loans — although less common — are available, but usually require meeting a laundry list of requirements to qualify. An interest-free loan means that what you see is what you owe.
If the loan is for $7,000, that’s how much you’ll have to pay back. There are no hidden interest charges to worry about now or ever. Keep reading to learn where you can find interest-free loans, and how they differ from subsidized loans.
The benefits of interest-free student loans
The primary benefit of an interest-free loan is — paying no interest. This might seem obvious, but most borrowers don’t realize how much paying interest can extend loan repayment.
Let’s say, for example, you owe $20,000 in student loans on a 10-year repayment plan. Without any interest charged, your minimum monthly payment would be roughly $167. Now, let’s take that same loan amount and add a 5% interest rate.
Instead of paying $167 a month, your payment would end up being $212 a month. Also, instead of paying $20,000, you’d end up paying $25,440 total. That’s $5,440 in interest charges alone. Don’t underestimate the effect that interest rates have on loan repayment.
Where to find interest-free student loans
Interest-free loans are available, but they might require some digging to find. Some of the common places you can discover these types of loans include:
- Your college financial aid office
- Nonprofit organizations
- Private companies
- Association affiliations
- Religious organizations
- State government organizations
- Local government organizations
Each organization has different eligibility requirements to qualify for these types of loans. Here’s a look at three specific interest-free loans available.
Bill Raskob Foundation Loans
The Bill Raskob Foundation offers interest-free student loans to students at accredited colleges and universities. You must be a U.S. citizen attending an approved school to qualify for a loan through the organization. Also, loans aren’t available to first-year undergraduate students.
Foundation loan amounts range from $1,000 to $9,000.
Evalee C. Schwarz Charitable Trust for Education Loans
The Evalee C. Schwarz Charitable Trust for Education awards interest-free loans to qualified students who demonstrate a financial need. To qualify for a loan, you must be a U.S. citizen, attend school in the state where you reside, qualify for financial need (in the form of government grants).
You must also have an Expected Family Contribution (EFC) of $5,711.00 or less on their FAFSA. Loan amounts range from $5,000 to $15,000 and are capped at $60,000 lifetime per student.
Military Officers Association of America Loan
The Military Officers Association of America (MOAA) offers interest-free loans renewable for up to five years. Loans are for $7,000 per student per year. To qualify for an interest-free loan through MOAA, you must be under 24 years of age, have a parent eligible for MOAA membership, or be the child of active duty, Reserve, National Guard, or retired enlisted military personnel.
You’ll also need to have at least a high school G.P.A. of 3.0 or higher and meet other program requirements.
Other interest-free loans
Other interest-free loans are available, although they might only be available to local residents or specific groups. Here are a few other interest-free loans you may qualify for:
- Abe and Annie Seibel Foundation Loan
- The Scholarship Foundation of St. Louis
- Massachusetts No-Interest Loan Program
- Leo S. Rowe Pan American Fund
- International Association of Jewish Free Loans
Interest-free student loans vs. subsidized student loans
You’ve probably heard the term subsidized student loans if you’ve ever researched federal student loans before. Although they sound similar to interest-free loans, they’re actually very different.
Federal student loans are either subsidized or unsubsidized. The primary difference is who pays the interest while you’re in school. With unsubsidized loans, borrowers are on the hook for interest that accrues while they attend school. The Department of Education pays interest on subsidized loans for students attending school at least half-time, during the grace period, and during periods of deferment.
Subsidized loans are for students who demonstrate financial need, while unsubsidized loans aren’t based on financial need. So, eventually, individuals with subsidized loans will end up paying interest on their loans, either after they graduate, go part-time or leave school.
Another difference between interest-free loans and subsidized loans is that the federal government doesn’t back interest-free loans. Interest-free loans are usually provided by private companies and other organizations. When applying for interest-free loans, always read the fine print, as there may be stipulations that don’t provide as much protection as federal student loans.
How to save money on interest if you’re already paying off loans
For individuals with student loans already, you’ve probably seen how much interest can affect repayment. If you’re sick of paying down your loans only to see little change in your principal balance, you might be able to save money by refinancing your student loans.
If you have federal loans, keep in mind you’ll lose access to protections like repayment plans and student loan forgiveness programs. If that’s not a need for you, and you meet credit and income requirements, you could score a much lower interest rate by refinancing your student loans. Not only can you save thousands of dollars or more by refinancing to a lower rate, a student loan refinance can help you lower your monthly payment and let you pay off your loans faster.
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2Earnest: All rates listed above represent APR range. Rate range above includes optional 0.25% Auto Pay discount. Earnest disclosures.