Pros and Cons of Interest-Free Student Loans

No-interest loans save students thousands, but involve hassles.

By SHARE

Student loans that don't charge any interest—thus saving students thousands of dollars—sound like great deals.

[See a list of charities that make interest-free student loans.]

But while interest-free loans are almost always better deals than private student loans made by banks or credit unions, they typically don't offer some of the benefits of federal student loans.

Here are some pros and cons to consider before committing to an interest-free student loan. 

Pros: 

Big savings: Students with no-interest loans pay back exactly the amount they borrowed. That saves thousands of dollars in interest over the long term. Students who borrow the maximum $27,000 from the federal government's "unsubsidized" Stafford student loan program for four years' worth of tuition often end up repaying $10,000 more than they actually borrowed because of added interest. Those who take out private student loans, which can charge higher fees and interest, can pay tens of thousands of dollars worth of interest.

Helping others: Many of the charities that make interest-free student loans use the monthly repayment checks to fund loans for other students, so your money is directly helping fellow students.

 Cons:

 Applications: Many of the charities require extensive essays or personal interviews. To qualify for federal student loans, students need only fill out the Free Application for Federal Student Aid, which most students have to fill out to apply for other financial aid anyway.

 [Read about recent improvements to federal student loans.]

 Co-signers: Some charities require students to find adults with good credit who will promise to repay the money if the students fail to do so. Federal student loans don't require co-signers.

 Immediate repayment: Some charities require students to start making small monthly payments immediately. Federal student loans waive payments as long as students attend college at least half time.

[Read 11 Steps to Relief From Federal Student Loans.]

 No Forgiveness: Graduates who go into public service can have a portion of their federal student debts forgiven after 10 years of payments. Charitable loans don't qualify for the government's public service forgiveness.

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