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Interest Free Student Loans

Mildred Said:

Why not make student loans interest free?

We Answered:

Because someone other than the student will still bear the cost of carry on the loan. Money is a commodity that has a time value associated with it. If the student does not pay interest, lenders lose their incentive for underwritng the loans. In order to keep student loans available, lenders would have to be paid by someone else. The only entity that would likely do that is the Federal government or State governments. And neither has any money of its own; they both take money from individuals so interest free student loans would not actually be free...the interest cost would just be shifted to taxpayers. Students get the benefit of the loan...they should be happy to pay for that benefit.

Daniel Said:

are student loans interest free while you are going to school?

We Answered:

No, student loans are not interest free. A student loan borrower can choose to either pay the interest as it becomes due, or allow the interest to accrue, unpaid. Most students choose the latter option.

A couple of comments:

The "subsidized" Stafford loan is a form of need-based aid that is offered to financial aid applicants who demonstrate "exceptional need". The difference between a subsidized and a more standard Stafford loan (the kind that everybody else gets) is that the federal government pays the interest on the subsidized loan, so long as the borrower remains in school. Note that interest does accrue, just as it does on any other student loan - but that the government pays the tab, as a form of financial assistance to the student.

The same applies to the Perkins Loan program - another government-backed student loan that is offered to some students who demonstrate exceptional need.

The other comment relates to the treatment of the accruing interest. Some lenders "capitalize" that interest once, some capitalize it multiple times. We say that interest is capitalized when the lender adds it to the balance. The basic rule of thumb is - the fewer times interest is added, the less you will wind up owing in the end.

Consider, for example, a lender who capitalizes interest on the loan in December of every year. In that situation, the borrower will pay interest on that interest next year, because the interest added in year one will increase the balance when it comes time to compute interest in year two.

The capitalization treatment of interest is one of the few differences between Stafford lenders that you can look for in choosing which lender to approach.

Finally - absolutely - not only can you get a student loan for a master's degree - the amount you can borrow from the federal government goes up significantly. In addition to the Stafford loan max, graduate students are also eligible to borrow from the government's PLUS lending program, which was originally available only to the parents of undergraduate students.

I hope that information helped you - good luck!

Juan Said:

Interest free student loans, are there any?

We Answered:

I don't have a specific bank or program to recommend, but I did find this interesting report from National Public Radio about the question of sharia-compliant loans. The interviewer talked to a number of students, religious leaders and banking reps about how they were working around the problem - perhaps you will find something helpful in there.

Good luck to you - I really hope this helps!

Jessie Said:

High Interest tax free savings account and student loans?

We Answered:

If your morals are such that you need paranoia to do the right thing, we can help you out here. The government knows everything.

Cheryl Said:

How much do you save with an interest-free loan?

We Answered:

If you have to borrow money to study abroad, then the interest that you pay on that loan is the cost of that loan (or the interest free loan is worth that much to you).

For example; 10k borrowed at 10% per year costs 1k for each year of the loan.

10k borrowed at 0% per year costs nothing for each year of the loan.

This means that the interest free loan is worth 1k per year of the loan.

Isaac Said:

Took out an interest free student loan. Now have to pay interest on it!!!?

We Answered:

They were never interest free - the interest is inked to inflation so it is 'effectively' interest free - or that is what the government claim.

Ernest Said:

Do you think we should have interest free home loans and student loans in the US.? Why do we pay interest?

We Answered:

Good question, I think the posted clip below has the best answer.

I believe you have already seen this , but there are many people who have not.


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