Interest-Free Loans For Students: What To Know Before You Apply

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After several years of historically low interest rates, the rates on student loans are going up. Federal loans for undergraduate students are 4.99% for the 2022-2023 academic year, up from 2.75% in 2020-2021.

With rising interest rates, you may wonder if no-interest student loans are an option.

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Do Interest-free Student Loans Exist?

Most student loans charge interest, so you’ll repay more than the initial amount you borrow. Thanks to interest charges, your balance can grow significantly over time.

No-interest student loans can be an attractive alternative. They’re typically offered by nonprofit organizations, government agencies and universities. However, they’re more limited than other forms of loans.

Organizations that offer interest-free student loans usually restrict eligibility to certain groups, such as residents of specific counties or individuals belonging to a particular religion. The loan maximums tend to be lower than you can get with traditional student loans, and they’re unlikely to cover the total cost of attendance.

Where to Find Interest-free Student Loans

No-interest student loans can come from a variety of sources, but the most common are schools, state government agencies and nonprofit organizations.

Schools

Some colleges and universities operate interest-free loan programs for current students. These programs tend to be for relatively small amounts and are intended to cover emergency expenses.

For example, the University of Washington allows current undergraduate students to borrow up to $2,500. While the loans don’t accrue interest, they must be repaid by the next quarter.

Contact your college’s financial aid department to find out if any institutional aid is available.

State Agencies

No-interest student loans are also available from some state government agencies. One of the best-known is Massachusetts’ No Interest Loan Program. Eligible students can borrow up to $4,000 per academic year to pay for school, up to a maximum of $20,000, and receive 10-year repayment terms. Students must have demonstrated financial need and attend a qualifying school in Massachusetts.

Visit your state’s education agency to learn about financial aid options available in your area.

Nonprofit Organizations

Charitable and activist organizations can be excellent resources for no-interest student loans. These programs vary in structure; some offer small loan amounts while others will cover your remaining cost of attendance. Examples of programs include:

Common Eligibility Requirements for No-interest Student Loans

Not everyone is eligible for an interest-free student loan. Organizations and institutions that offer them usually have strict eligibility requirements. While the specifics vary by issuer, borrowers often must meet at least some of the following criteria:

Financial need. Many interest-free programs require students to demonstrate financial need, as reflected in the information they submitted in their FAFSA. Students may be asked for other financial information, such as bank statements, rental agreements or utility bills.
Residency. No-interest loan programs are often limited in scope, providing loans to students in specific areas, such as particular states, cities or counties.
Academics. While some programs only consider students’ financial needs, some require applicants to have high GPAs and standardized test scores to qualify for no-interest loans.
School. Issuers may have restrictions on the type of school students can attend, such as requiring students to attend particular schools or public universities within the issuer’s state of operation.

Pros and Cons of Interest-free Student Loans

Compared to high-interest student loans, loans that charge no interest can be appealing. But there are some drawbacks to weigh against their benefits.

Pros

You repay only what you borrow. With traditional student loans, interest charges can add thousands to your overall repayment cost. But with no-interest loans, you only repay the principal amount.
In-school payments are usually small. Interest-free loans often require students to make payments while they’re in school. However, the amounts are usually small, such as $25 or $50 per month.
You may qualify for a grace period. Borrowers can often take advantage of longer-than-typical grace periods than they’d get with other loan types. That means you have more time after graduating before you have to begin repayment. Grace periods are commonly six months, but some no-interest loan programs offer grace periods as long as a year.

Cons

You may need a guarantor. Many no-interest loan programs require the borrower to add a guarantor—someone with reliable income and good credit—to the loan application. If you don’t make your payments, the guarantor promises to make them instead. Not everyone has a relative or friend willing to guarantee the loan, so that requirement can be a major obstacle.
The loan is unlikely to cover your entire repayment cost. No-interest programs tend to issue relatively small loan amounts. It’s unlikely that interest-free loans will cover your entire education cost, so you will probably need to find other financing to cover the remainder through gift aid or traditional student loans.
Eligibility requirements are strict. Most interest-free student loan programs have strict eligibility requirements, and usually only serve specific student populations. The majority of college students won’t qualify for an interest-free loan.

Alternatives to No-interest Loans

Although no-interest student loans are available, they are limited in their scope. If you need additional help covering the cost of college, explore these alternative options.

Gift Aid

Gift aid includes scholarships and grants. Unlike loans, these forms of aid don’t have to be repaid. Instead, organizations issue gift aid based on your achievements, personality traits, demographic makeup or other criteria. Scholarships and grants range from small awards to more substantial amounts that cover the full cost of tuition. You can find opportunities through databases like FastWeb and CareerOneStop.

Work-study Programs

Some students can qualify for federal or state work-study programs. If eligible, you’ll get a part-time job related to your major, and you can use some or all of your earnings to pay some of your education expenses. To qualify, you must complete the FAFSA and talk to your college’s financial aid department to learn about program requirements.

Income Share Agreements

Income share agreements (ISA) are relatively rare, but they are increasing in popularity. Unlike traditional loans, ISAs give you upfront cash but require you to pay a percentage of your income for a specific time period after graduation. You only make payments once you meet a minimum income threshold—such as $35,000 per year—and you pay a fixed percentage of your earnings after that.

Low-interest Student Loans

If no-interest student loans aren’t an option, you may qualify for low-interest loans from the following sources:

Federal loans. Despite recent rate increases, federal student loans still have relatively low rates, especially for undergraduate students. And unlike other forms of credit, loans for undergraduate students don’t require credit checks, nor do they have minimum income requirements. To apply, fill out the FAFSA.
Institutional loans. Some colleges and universities operate their own lending programs. These programs tend to offer low rates and generous repayment terms, and students that aren’t eligible for federal financial aid may qualify for institutional loans. To find out if you’re eligible, contact your school’s financial aid department.
Private student loans. Private loans come from banks, credit unions and financial institutions. You can usually borrow up to the total cost of attendance, and you can have as long as 15 or 20 years to repay the loans. They often have higher interest rates than other loan types, but you may qualify for a loan with a competitive rate by adding a co-signer with a positive credit history to your credit report. It’s wise to shop around and compare options from top private student loan lenders to find the best rates and terms.