Which Student Loan Has No Interest? A Closer Look
Unravel the complexities of student loan interest. Learn which loan types offer interest relief and practical ways to reduce your overall borrowing expenses.
Understanding student loan interest can be complex, especially when considering the idea of a “no interest” loan. While truly interest-free student loans are uncommon, certain scenarios and specific loan types allow borrowers to avoid paying interest under particular conditions. This article clarifies how student loan interest functions, identifies instances where borrowers may not be responsible for interest charges, and examines strategies to reduce or eliminate interest payments.
How Student Loan Interest Works
Student loans involve a principal amount, the money borrowed, and an interest rate, a percentage charged on the principal. Interest begins to accrue on the loan balance from a specific point in time.
Interest capitalization occurs when unpaid accrued interest is added to the principal balance of the loan. This increases the total cost of the loan over time.
Federal student loans are generally categorized as either subsidized or unsubsidized, which dictates when interest begins to accrue and who is responsible for it. For unsubsidized loans, interest accrues from the moment the funds are disbursed, even while a student is in school, during the grace period, or during periods of deferment. The borrower is responsible for paying all accrued interest on these loans.
Conversely, subsidized loans behave differently regarding interest accrual. For these loans, the U.S. Department of Education pays the interest that accrues while the borrower is enrolled in school at least half-time. The government also covers interest during the loan’s six-month grace period after leaving school and during periods of approved deferment.
Federal Loans with Interest Subsidies
Direct Subsidized Loans are the primary federal student loan type that offers an interest subsidy. The U.S. Department of Education pays this interest on the borrower’s behalf while they are enrolled at least half-time in an eligible program.
This interest subsidy also extends to the six-month grace period after a student graduates, withdraws, or drops below half-time enrollment. The subsidy additionally applies during periods of authorized deferment, such as for economic hardship or unemployment.
Once the grace period ends, or if the borrower no longer qualifies for deferment, interest on Direct Subsidized Loans begins to accrue and becomes the borrower’s responsibility. The interest rate on these loans is fixed for the life of the loan.
Another type of federal loan that historically offered interest subsidies was the Federal Perkins Loan Program. This program provided low-interest loans to students with exceptional financial need. However, the authority for schools to make new Perkins Loans expired on September 30, 2017, and no new loans have been issued since then. Existing Perkins Loans still carry their original terms, including interest subsidies under specific conditions.
Other Ways to Reduce or Avoid Paying Interest
Borrowers with unsubsidized federal student loans can effectively avoid paying interest on a portion of their loan by making payments during the grace period. Since interest accrues on unsubsidized loans from disbursement but does not capitalize until the end of the grace period, paying off the principal balance before capitalization prevents that accrued interest from being added to the principal. This action reduces the total amount on which future interest will be calculated.
Certain Income-Driven Repayment (IDR) plans also offer benefits that can reduce or eliminate interest payments under specific circumstances. For example, under the Saving on a Valuable Education (SAVE) Plan, if a borrower’s monthly payment does not cover all of the accrued interest, the government pays the remaining interest that is not covered by the payment. This prevents the loan balance from growing due to unpaid interest. This benefit applies to both subsidized and unsubsidized loans.
Some specific, less common programs or benefits can also lead to a borrower not paying interest. Certain employer-sponsored student loan repayment assistance programs may contribute directly to the loan principal and interest. If an employer covers the full interest amount, the borrower effectively pays no interest. Similarly, some state-specific loan forgiveness or repayment programs, often for professionals in high-need fields, may cover a portion of the loan balance, including accrued interest. These opportunities are generally highly specialized and limited in availability.