Low-Interest Student Loans
For many families, the economic impact of the so-called “Great Recession” left behind damage that’s slow to abate. In June of 2013, for example, median household income in the United States was still 6% lower that the level seen in December of 2007, according to the The New York Times. It’s just taking a long time for the economy to fully recover.
As a result, many families are desperate for low-interest student loans. These are the loan products that will allow students to get the education they’ll need in order to compete in the workforce, but loans like this won’t come with the high price tags that can keep some families out of the loan market altogether.
The lowest student loan rates come with products that have been developed and released by the U.S. Department of Education. These federally funded loans are designed to help all American students attend school, even if their families find it difficult or impossible to pick up the tab for tuition and supplies. There are two types of loans that the Department offers that are traditionally considered low-interest products: Direct Subsidized Loans and Perkins Loans. Direct Subsidized Loans are designed for undergraduate students who are attending a reputable school at least half-time. These students must demonstrate their inability to cover the cost of school, and they must meet specific eligibility requirements concerning citizenship and criminal background, but these loans provide benefits that could make the hassle of the application process more than worthwhile. In 2016-2017, Direct Subsidized Loans come with a 3.76% interest rate, according to the U.S. Department of Education, which is much lower than the rate used in the private marketplace. In addition to the low rate, students who get loans like this aren’t responsible for interest payments during their time in school. Governmental sources cover those costs. That could help students to save a significant amount of money during the life of the loan.
Typically, when students obtain a loan, they defer their interest payments while they’re in school. This allows them to focus on their education and their courses, rather than getting jobs and paying bills, but all of those interest bills pile up during the time in which students are in school. When these students graduate, some companies wrap the interest owed into the principal amount the student owes, and that bigger amount is used as the base the interest fees are applied to. It’s a bit like paying fees on top of fees, and it can make a loan immensely expensive. Direct Subsidized Loans just don’t work this way.
Perkins Loans are also considered low-interest loans, as these products also cover a student’s interest fees while that student is in college. These loans also come with a low overall rate of 5%. But these loans are somewhat difficult to get, as students who want these loans must demonstrate:
- Exceptional financial need
- Enrollment in a participating school
- At least part-time enrollment
- Low levels of prior borrowing, as there are caps on the amount a student can borrow
In addition, some facilities that want to participate in the Perkins Loan program are unable to do so. For example, news reports indicates that Delaware State University lost the ability to issue new Perkins Loans because too many prior students had defaulted on these loans. Restrictions like this could mean some students can’t get Perkins Loans, because their schools can’t accept the funding.
Private Student Loans With Low Interest
Few private loans come with the same kind of perks seen in the federal marketplace. It’s rare to see private loan officers cover interest payments, for example. Lenders might also be a little less willing to work on unusual payment programs for students in financial distress. It’s just not the sort of thing a private bank can do and still stay in business. But there are some private lenders who do offer loan products with attractive and low interest rates.
Products like this are designed for students who have excellent credit scores and/or a cosigner who has a great credit score. These students are considered ideal borrowers, as it’s unlikely that they’ll walk away from their responsibilities without paying.
The banks tend to reward this behavior, and compete for the business these students can offer, by offering competitive loans with low rates. Students that don’t have excellent credit scores, and who don’t have relatives who might be willing to share their excellent credit scores, might not be eligible for these low-rate loans. The banks consider loans to people like this a little “risky,” as it might be easy for a person to just walk away from the loan without paying. It might also be hard for people of low income levels to pay their loans back, even though they might want to do so. Banks must account for these risks, and they do so by increasing the interest rate.
Things to Watch For
Low-interest student loans can seem a little too good to be true, and in some cases, a little skepticism is reasonable, as some of these loans come with clauses that could make a low-interest loan a very expensive loan.
For example, students who have federal loans sign up for products with fixed interest rates. This means that the amount of interest charged on these loans shouldn’t jump around from day to day or year to year. However, an analysis published by MainStreet suggests that this fixed rate can disappear when students fall behind on their loan payments, and if these students extend the life of the loan by making smaller payments over a longer period of time, they could be spending a significant amount of money. In fact, experts quoted by MainStreet suggest that it’s impossible for these students to know how much the loan will actually cost at the end of the repayment program if they fall behind and extend. Students who keep up with their payments may never have to deal with this problem, of course, but it’s something that all students should keep in mind when they accept federal loans.
Private loans may not have fixed rates at all, meaning that students might sign up for these loans during a time in which money is relatively easy to get and cheap to borrow, and then when they need to repay those loans, they may see their interest rates climb as the stock market climate changes. Students like this could refinance, of course, but a moving interest rate is the catch involved in some low-interest rate loans.
Some private loans also come with clauses that allow the bank to charge fees if a student pays off the balance of the loan early. These clauses are designed to allow the bank to recoup the entire amount of money owed in interest, and often the interest rate on a loan like this is low enough that a student wouldn’t be bothered to pay off the loan early. But it’s still a clause students should watch for before they sign.
But many low-rate loans come with no sneaky clauses or catches at all. They’re designed to help students pay for school, and that’s just what they do. But students can ensure that the overall cost of the loan stays low by:
- Making all payments on time
- Staying in touch with the loan processor, reporting any changes in address
- Making additional payments on the principal, if possible
- Refinancing the loan if the rate is variable and begins to climb
Types of Student Loans