How to Earn Interest from Student Loan Money

Raghuram Sukumar Personal Finance Leave a Comment

One of our readers had asked had following questions about Student Loans.

  • How can one save on Student Loan Interest?
  • When is best to get a Student Loan (to minimize interest rates)?
  • What about exchange rates?

Obtaining student loans in the U.S. as an international student is a difficult thing to do. Lending institutions typically require a co-signer (a relative or a friend, who must be a U.S. citizen or is a permanent resident), who must co-sign to earn a loan approval. In recent years, a few business schools have introduced programs where international students can obtain student loans without the need for a co-signer. However, that option is not available to all academic programs and international students.

Student Loan Interest Rates

Higher education student loans in India usually have 12 to 13% interest rates, which is much higher compared to the 4 to 9% rates among U.S. Banks. Here are a few ways to save money on your student loan interest from loans that you source outside the United States.

For your first semester, let’s assume you withdraw $10,000 in total from your Student Loan:

  • Tuition Fee: approx. $5,000
  • Living Expenses: $5,000.

Per month living expenses will be around $350 to $700. You will be left with $4,300 in your student free checking account (How to Open Bank Account in US and Types of Bank Account). Student checking accounts doesn’t pay any interest. Also, savings accounts in banks would typically offer less than 0.5% interest rate.

If you have $4,000 in your savings account, you will be paid around $3.33 per month. On the other hand, you can opt to deposit $4,000 in an online savings account that pays around 2.00% per year. Another option would be to get CDs (Certificates of Deposit) which are similar to a Fixed Deposit in India. CDs are available in the U.S. in various terms such as 3 months, 6 months, 9 months and so on.

Save Money

Month 1: Estimate your living expense and have some backup money (~3 months). You can have $1,500 in your checking account. Buy a 3-month CD for $3,500.

Month 4: Take $1,500 from 3 months and buy another CD for $1,500.

How much will this pay you?

  • CD -1: 3 months, 5% APY = $38.
  • CD -2: 3 months, 5% APY = $25.

Total Savings = $63

Note: Prevailing interest rates in the U.S. are around 2%. It was 5% in 2007. Due to the bad economy, interest rates have dropped quite low. But when the economy improves, interest rates will also go up.

Wisely investing some of your savings here and there can make your money earn. Effectively managing your money enables you to effectively minimize the interest rates that you must pay for your student loans.

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