Lower College Loan Rates Based on Grades?

Here's a new twist on college aid: a student loan with a lower interest rate based on your academic standing.

MyRichUncle, a private student loan originator, has been experimenting with rate discounts of 0.25% to 0.75% for borrowers who submit information similar to what you would find on a college application like grades, area of study and academic institution.

Click here to visit FOXBusiness.com's College Planning page.

The company insists that this isn't charity, it simply wants to change how students are approved for non-government-backed loans, from the traditional credit-worthiness criteria that often require parents of students with no credit history to co-sign loans to what it believes is a more sensible, and fiscally accurate, method.

"What we're really doing is measuring the capacity to take on debt," says company president Raza Khan. "Students who tend to do well in school tend to be more likely to repay their loans and so, from our perspective, should be rewarded with a lower interest rate."

Feedback, both from borrowers and those who underwrite the loans, has been positive, he says.

Any borrower who submits the extra academic information on top of the typical credit background receives 0.25% off their rate with some outstanding students receiving a cut of as much as 0.75%. College juniors with good grades studying a subject in great demand are more likely to receive a bigger discount than high school seniors.

The company started the merit discount eight months ago and although it is small for now, Khan says MyRichUncle wants to offer deeper discounts based on academics in the future. He hopes that eventually academic criteria would just become part of the regular loan application process and so would rates based on those good grades.

According to Bankrate.com, the company's average interest rate on an undergraduate student loan is currently around 6.38%, several points less than some competitors. You can apply for one of their loans online at MyRichUncle.com.

Copyright (c) 2006 MarketWatch, Inc.