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Subsidized Student Loans: Everything You Need To Know

If you need to borrow for school, it’s usually best to rely on federal Direct Subsidized Loans first before turning to other types of student debt.

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By Angela Brown

Written by

Angela Brown

Writer

Angela Brown is a student loan, personal finance, and real estate authority and a contributor to Credible. Her work has appeared in Fox Business, LendingTree, FinanceBuzz, and Yahoo Finance.

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Edited by Renee Fleck

Written by

Renee Fleck

Editor

Renee Fleck is a student loans editor with over five years of experience in digital content editing. Her work has been featured in Fast Company, Morning Brew, and Sidebar.io, among other online publications. She is fluent in Spanish and French and enjoys traveling to new places.

Updated December 15, 2023

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances.

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Subsidized student loans are provided by the U.S. Department of Education for undergraduate students with financial need. Unlike unsubsidized loans, the government pays the interest on your subsidized debt while you’re in school and during a six-month grace period, which can help lower total repayment costs. Subsidized student loans also have flexible repayment terms and a fixed interest rate.

If you’re interested in a Direct Subsidized Loan, here’s what you should know. 

Overview of subsidized student loans

If you need to take out student loans, it’s generally a good idea to start with any Direct Subsidized Loans available to you before considering other types of federal or private student debt. This is mainly because these loans provide several benefits that can keep your costs low while in school, as well as simplify your future repayment.

For eligible undergraduates, these advantages include:

  • Subsidized interest: The government will cover any interest that accrues on a Direct Subsidized Loan while you’re in school at least half-time, during your six-month grace period, and during any deferment periods.
  • Fixed interest rates: All federal student loans — including subsidized loans — come with fixed interest rates. This means your rate will stay the same throughout the life of the loan, and your payment amount will only change if you sign up for a different repayment plan.
  • No credit check: Unlike private student loans, Direct Subsidized Loans don’t require a credit check. This means you can get a subsidized loan even if you have poor or no credit as long as you meet the other requirements.
  • Cosigner not required: Direct Subsidized Loans also don’t require a cosigner.
  • Grace period: Subsidized loans come with a six-month grace period that begins after you leave school or drop below half-time enrollment. During this time, you won’t have to make payments, and the government will pay any interest that accrues.
  • Flexible repayment options: Like other federal loans, Direct Subsidized Loans provide multiple repayment plan options in addition to the standard 10-year repayment plan. For example, you could sign up for an income-driven repayment (IDR) plan that bases your payments on your income. Or you might choose a graduated repayment plan, which starts with lower payments that slowly increase over time.
  • Access to federal benefits: If you take out a subsidized loan, you’ll also have access to major federal benefits and protections — such as generous deferment and forbearance options.
  • Potential loan forgiveness: Several student loan forgiveness programs are available to federal loan borrowers. For example, if you work for a government or not-for-profit organization and make qualifying payments for 10 years, you might be eligible for Public Service Loan Forgiveness (PSLF).
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Note:

Direct Subsidized Loans are only available to undergraduate students who demonstrate financial need.

Subsidized vs. unsubsidized loans

Subsidized loans and unsubsidized loans each have different eligibility requirements, interest terms, and borrowing limits. Here’s a closer look at how Direct Subsidized Loans compare to Direct Unsubsidized Loans:

Direct Subsidized Loans
Direct Unsubsidized Loans
Interest rates
  • Undergrad: 5.50%
  • Interest is paid by the government while in school and during a 6-month grace period.
  • Undergrad: 5.50%
  • Graduate and professional: 7.05%
  • Borrowers are responsible for all accrued interest.
  • Borrowing limits
    $3,500 to $5,500 per year ($23,000 total limit)
  • Dependent undergrad: $5,500 to $7,500 per year ($31,000 total limit)
  • Independent undergrad: $9,500 to $12,500 per year ($57,500 total limit)
  • Graduate and professional: $20,500 per year ($138,500 total limit)
  • Find Your Student Loan

    Direct Subsidized Loan eligibility

    Your school will use the information you provide in the Free Application for Federal Student Aid (FAFSA) to determine if you’re eligible for a Direct Subsidized Loan. To qualify, you must:

    • Be an undergraduate student
    • Demonstrate financial need
    • Be a U.S. citizen or an eligible noncitizen
    • Have a valid Social Security number
    • Be enrolled at least half-time at a school that participates in the federal student aid program
    • Be enrolled in an eligible degree or certificate program
    • Have a high school diploma or state-recognized equivalent, like a General Educational Development (GED) certificate

    Determining financial need

    Need-based financial aid is reserved for undergraduates who need financial support. Your school’s financial aid office will calculate your need based on: 

    • The school’s cost of attendance: This is the estimate of how much you’ll pay annually in tuition, fees, room and board, books, supplies, and other eligible expenses.
    • Your Expected Family Contribution (EFC): Your school calculates this number based on the information you provide in the FAFSA, and it’s an estimate of what your family could reasonably afford for your education. Keep in mind that this isn’t how much your family will actually have to pay — it’s simply an index number your school uses to determine how much financial aid you qualify for. (The EFC will be renamed the Student Aid Index on the 2024-25 FAFSA.)

    To determine you finance need, your EFC is subtracted from your school's cost of attendance. For example, if your school’s cost of attendance is $16,000 and your EFC is $11,000, you’d be eligible for up to $5,000 in need-based aid.

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    Note:

    Your school will ultimately determine the exact amount you will be awarded in subsidized loans, and this amount can’t exceed your financial need.

    Borrowing limits

    Keep in mind that student loan borrowing limits will also affect how much need-based aid you can get. For example, while you might have substantial financial need, you can only borrow up to a lifetime limit of $23,000 in Direct Subsidized Loans. 

    Below are the borrowing limits for subsidized student loans for dependent undergraduate students in 2023: 

    • First-year annual loan limit: $3,500
    • Second-year annual loan limit: $4,500
    • Third-year and beyond annual loan limit: $5,500
    • Aggregate loan limit: $23,000 total

    After you’ve exhausted any Direct Subsidized Loans that you’re eligible for, Direct Unsubsidized Loans are often a good second choice. You might also consider Direct PLUS Loans or private student loans to fill any financial gaps.

    Find Your Student Loan

    Applying for a subsidized loan

    To apply for a Direct Subsidized Loan, you’ll need to register for the FAFSA. Be prepared to provide your personal and financial information when completing the form — for example, your Social Security number and most recent tax return information. If you’re a dependent student, you’ll also have to provide one of your parent’s information. 

    After you submit the FAFSA, your school will send you a financial aid award letter detailing what federal student loans and other financial aid you’re eligible for. You can then decide which aid you’d like to accept.

    How long does it take to get a subsidized student loan?

    It often takes a few months to get approved for a federal student loan, depending on your school and when you submit the FAFSA. Most schools send out financial aid award letters around the same time as acceptance letters, so expect to hear from your college in the spring. Your school’s financial aid office can give you a more exact estimate of when you should receive your letter.

    Any federal student loans that you accept will be distributed directly to your school and will first be used to cover any tuition and fees that you owe. If there’s a remaining balance, it will be refunded to you to use for other education expenses. Note that schools typically disburse federal student loans once per term — this could be once per semester, trimester, or quarter, depending on your school. 

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    Keep in mind:

    Some schools add a 30-day waiting period before funds can be released to first-year undergraduate students. Check with your school to see if it uses this rule.

    Repaying subsidized loans

    After you leave school or drop below half-time enrollment, your Direct Subsidized Loan will enter a six-month grace period. During this time, the government will cover any interest that accrues on the loan, and you won’t have to make any payments.

    Once your grace period ends, your loan will start out on the standard 10-year repayment plan. But several other repayment options are also available, which provide flexibility and support if you’re struggling to make your payments. 

    Here are some repayment plans to consider:

    • Income-driven repayment plan: On an IDR plan, your payments will be based on your income — typically 10% to 20% of your discretionary income. Additionally, you can have any remaining balance forgiven after 20 or 25 years, depending on the plan.
    • Graduated Repayment plan: With this plan, payments start out lower and increase every two years. This could be a helpful option if you expect to earn a higher income in the future.
    • Extended Repayment plan: This plan lets you spread out your loan payments over 25 years, which could greatly reduce monthly payments. Just keep in mind that you’ll pay more in interest over time with a longer repayment term.

    If you’re having a hard time making your payments, other options include:

    • Deferment: If you need to temporarily postpone your loan payments, deferment could help. Some scenarios that could make you eligible for deferment include undergoing cancer treatments, facing economic hardship, losing your job, or enrolling in an approved fellowship program. With a Direct Subsidized Loan, you won’t have to pay interest that accrues during a deferment period.
    • Forbearance: This is another option for pausing your loan payments. Two types of forbearance are available for federal loans: mandatory forbearance that your servicer must grant in certain situations, and general (or discretionary) forbearance that’s granted on a case-by-case basis. You're responsible for all interest that accrues on subsidized loans during forbearance periods.
    • Loan forgiveness: If you meet certain requirements, you might be eligible for a federal student loan forgiveness program. Many of these programs are geared toward borrowers working in specific careers, such as doctors, lawyers, and teachers.

    Consider private loans to fill the gaps

    After you’ve exhausted your scholarship, grant, and federal student loan options, private student loans could help cover any remaining expenses. While these loans don’t come with federal protections, they do offer some benefits of their own — for example, you can apply at any time, and you might be able to borrow more than you’d get with a federal loan.

    If you decide to take out a private student loan, be sure to consider as many lenders as possible to find the right loan for your needs. 

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    Subsidized student loan FAQ

    What is a subsidized student loan?

    Subsidized student loans are a type of federal loan reserved for undergraduate students with financial need. These loans are issued by the U.S. Department of Education, and the amount a student can borrow is determined by the school. The government pays the interest on subsidized student loans while you’re in school, during a six-month grace period after leaving school, and during periods of deferment. 

    Which student loan is better, subsidized or unsubsidized?

    Subsidized student loans are generally the better option to start with since they come with more advantages than unsubsidized student loans. With subsidized loans, you won’t have to pay interest on the loan until six months after you leave school. The government also pays interest during any periods of deferment, unlike unsubsidized loans. However, you must demonstrate financial need to qualify for subsidized loans.

    What are the disadvantages of a subsidized student loan?

    While subsidized student loans offer many benefits, they also have some disadvantages. For example, subsidized student loans are only available to undergraduate students who demonstrate financial need. These loans also have lower borrowing limits than unsubsidized loans, which means you may have to take out additional debt to cover the cost of your education.

    What is the income level for subsidized student loans?

    There is no specific FAFSA income limit, which means any undergraduate student can apply to receive subsidized student loans. However, subsidized loans are only awarded based on financial need. Your school’s financial aid office will subtract your Expected Family Contribution (EFC) from the school’s cost of attendance, and the amount remaining is how much you are eligible to borrow.

    Does taking a subsidized loan hurt your credit?

    Just like any other type of debt, a subsidized student loan will appear on your credit report. It’s possible it will affect your credit score, but whether it helps or hurts your credit depends on how you manage the loan.

    If you make your payments on time and in full, taking out a subsidized student loan shouldn’t hurt your credit. However, any late or missed payments will negatively impact your credit score. 

    Meet the expert:
    Angela Brown

    Angela Brown is a student loan, personal finance, and real estate authority and a contributor to Credible. Her work has appeared in Fox Business, LendingTree, FinanceBuzz, and Yahoo Finance.

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