Snagging a no-interest student loan can feel like you’ve won the lottery. Depending on the size of your loan, not having to worry about paying off interest can potentially add up to thousands of dollars in extra savings.
Federal loans that come from the U.S. Department of Education tend to come with interest attached. So if you have filled out a FAFSAⓇ for federal student aid, those federal student loans will come with interest. However, if you are determined to look for loans that are interest-free, you won’t find any directly from the government.
But a growing number of organizations do provide interest-free loans. Unlike grants and scholarships, an interest-free loan is still a loan at the end of the day, and will need to be paid back over time, even if you aren’t paying interest on the initial amount. While they can be somewhat tricky to find, and not so simple to apply for, no-interest student loans do exist and may be worth looking into for the potential savings.
What Is a No Interest Student Loan?
Here’s what an interest-free loan is not: free money. No-interest student loans must still be paid back, you would just only have to pay back the actual amount of the loan, nothing more. Traditional student loans, whether federal or private, all come with interest rates that are either fixed or variable.
For the 2018 to 2019 school year, the government raised the undergraduate interest rates from the previous 4.45% to 5.05%. Private loans have a much larger range of interest rates, usually anywhere from around 4% to up to 14.3% APR.
No-interest loans might help you get out of debt faster. On a standard 10-year federal student loan repayment plan, with $30,000 in debt and a 5% interest rate, you would end up paying more than $8,000 in interest alone. (And that’s calculated with 120 minimum loan payments of about $320 a month.) In order to understand why an interest-free loan may benefit you, it’s important to learn how interest affects the payments of your loans over time.
Unlike other forms of debt, like credit cards, for instance, federal student loans gain interest daily. So, on that same $30,000 loan with 5% interest rate, every day $4.11 is added to the amount you owe. So with a traditional loan, the amount of interest that adds up between your monthly payments is determined by the daily formula:
Daily Interest Rate = (Interest Rate / 365) x Principal Balance Due
Interest is charged on your principal balance, meaning the initial amount you owe for the loan. So your amount of interest owed will not change, even as you start to pay down your loan.
That’s why, while it’s not as common, a no-interest student loan is an intriguing option, since you will never see your loan debt grow, only shrink, as you begin making payments.
Applying for Interest Free Student Loans
Because of the lucrative nature of a loan with no interest attached, applying for and being awarded an interest-free student loan is a process that better resembles applications for college grants or scholarships, rather than the traditional student aid process.
However, you will likely still want to fill out a FAFSA, even if you want to focus on loans without interest. While federal loans generally come with interest, they typically have lower rates than private lenders, and federal loans come with benefits such as income-based repayment that private lenders don’t often offer.
Many interest-free student loans are local and state-based, rather than national. They may ask for proof that you are a resident of a certain state. Most might ask for an essay, as well as a solid academic record, and might even require an interview.
The process is more intense than a regular student loan because funds are limited. The sooner you apply, the better. You can find a few places to begin your search for interest-free student loans here . Many state agencies and philanthropic organizations use the term “scholarship loan ,” which is a loan that often does not need to be paid back if the recipient completes the scholarship loan requirements.
However, if the scholarship loan requirements are not fulfilled, the recipient typically has to pay back the loan in full—with interest… Keep in mind though that those organizations are still separate from the government, and not the same repayment plan as Public Service Loan Forgiveness, which is offered through the federal government.
Subsidized Loans: No Interest Until After Graduation
If a no interest loan will not cover your entire financial aid need for school, you might want to carefully review the aid package offered from filling out your FAFSA. The government will distribute two types of direct loans to undergraduate students: subsidized and unsubsidized .
Subsidized loans are available to undergraduates who demonstrate financial need. The U.S. Department of Education pays the interest accruing on the loans while you’re in school, during your six-month grace period, and when your loans are in deferment.
On the other hand, unsubsidized student loans are available to grad students and undergrads, and they don’t require that students demonstrate need in order to qualify for these loans. Interest accrues while you’re in school, and during grace periods, deferment, or forbearance—and you’re responsible for paying the interest.
With federal loans, you can apply for many different types of income-based repayment plans, deferment, or forbearance, and those safety nets might outweigh the benefit of taking a straight private loan with no extra benefits, or even one with no interest.
Refinancing Your Student Loans to Take Control of Your Interest Rates
If you have already graduated, odds are at least one of your student loans, if not all of them, came with an interest rate. If you have high interest rates, or a lot of unsubsidized loans, or private loans with interest, refinancing your student loans might be one way to help reduce the amount of interest you will pay in total over time.
Keep in mind refinancing can result in the loss of some of the benefits for federal student loans since you’re working with a private company and not the government.
While refinancing can’t get you down to zero interest, it can potentially get you a lower interest rate on your student loans. You can apply for student loan refinancing with companies like SoFi, and refinancing can combine your federal student loans and private loans, rolling them all into one brand-new loan.
Qualifying for a lower interest rate may mean you’ll pay less interest over the life of the loan. Alternately, if you’re looking to lower your monthly payments, you can extend your loan term when you refinance, potentially securing you a more manageable monthly payment.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.