No-interest loans or interest-free loans, also known as scholarship loans, are offered by nonprofit organizations, state governments, private companies, religious organizations, and even some sororities or fraternities. 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?
Interest-free loans are loans that do not accrue interest. Unlike grants and scholarships, the loan amount must be repaid. Because there are no interest charges the amount repaid by the borrower remains the same as the original amount borrowed. Traditional student loans, whether federal or private, all come with interest rates that are either fixed or variable.
For the 2022-2023 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 4.99%, the rate on Direct Unsubsidized loans for graduate and professional students is 6.54%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 7.54%. The interest rates on federal student loans are fixed and are set annually by Congress.
Private loans have a much larger range of interest rates, and may range anywhere from around 1% to up to 13% 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.
Federal student loans accrue 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 the principal balance, meaning the initial amount you owe for the loan.
While it’s not as common as a traditional loan, a no-interest student loan is an intriguing option, since it will never accrue interest.
Applying for Interest Free Student Loans
The application process for most interest-free loans resembles the application process for grants or scholarships more closely than a traditional loan application.
Students will generally still want to fill out the Free Application for Federal Student Aid (FAFSA®), even if you want to focus on loans without interest. Some interest-free loans use the FAFSA to determine financial need. And while federal loans generally accrue 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.
Interest-free student loans are often local and state-based, rather than national. They may require proof of residency in a certain state. Some may also have an essay requirement, as well academic requirements, and might even require an interview.
The process is more intense than a regular student loan because funds are limited. Some state agencies and philanthropic organizations use the term “scholarship loan” to refer to interest-free loans. Scholarship loans may also be repaid through public service.
Keep in mind though that those organizations are still separate from the government, and do not offer the same repayment plans as the loans offered through the U.S. Department of Education.
Subsidized Loans: No Interest Until After Graduation
Interest-free loans are relatively rare, so it’s possible that students will still need to rely on federal student aid. There are two types of federal Direct loans available 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.
Recommended: Comparing Subsidized vs Unsubsidized Student Loans
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.
Federal student loans also offer a few different payment plans, including income-driven repayment plans, so that borrowers can find the option that works best for them. There are also borrower protections like deferment or forbearance, that may act as a safety net for borrowers who find themselves facing financial difficulties down the road.
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No-interest loans, sometimes called scholarship loans or interest-free loans, are loans awarded to students that do not accrue interest at all. While rare, there are some nonprofits, corporations, and religious organizations that may offer interest-free loans to students. In the case that students don’t qualify for a no-interest loan, they may want to see what aid they were offered by the federal government or their college.
Sometimes, financial aid and scholarships don’t provide enough funding to pay for college. In that case, some students may look into private student loans as an option. While private student loans can be helpful tools when it comes to paying for college, they do not have the same borrower protections as federal student loans, so should only be considered after all other aid options have been reviewed.
Another option is to refinance your student loans to improve your interest rate and possibly change your loan term. Refinancing federal student loans into private student loans would be that you have to give up federal benefits like income-driven repayment and loan forgiveness.
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