Subsidized Student Loans: Overview

When borrowing to help cover college costs, subsidized student loans are among the top financing options for students with financial need. In the 2022-23 academic year, students borrowed nearly $44 billion in subsidized loans, according to College Board. Whether it's your first time taking out student loans or you need a loan for subsequent school years, here's what to know about subsidized student loans.

What is a subsidized student loan?

A federal subsidized student loan is a type of education loan that's offered by the U.S. Department of Education (ED). It's one of four loans classified under the William D. Ford Federal Direct Loan Program, and it's available to undergraduate students who demonstrate financial need.

As the name suggests, subsidized Direct Loans offer a benefit that distinguishes them from other available federal student loans. The ED covers accrued interest on the loan during specific periods:

• During school, if you're enrolled at least half-time
• During your loan's grace period (the first 6 months after graduating, leaving school, or dropping below half-time enrollment)
• During any deferment periods

Since the government pays for the interest charges during these periods, when you start repaying your subsidized student loan, your loan balance won't include past interest charges. This notable benefit helps you keep your total unpaid subsidized loan balance low so you can be debt-free sooner.

Subsidized vs. unsubsidized loans

Subsidized Direct Loans share a few similarities with unsubsidized loans. Both offer fixed interest rates and let borrowers access other federal programs, like income-driven repayment and loan forgiveness.

However, unsubsidized loans differ from subsidized student loans in a few ways. Unsubsidized loans don't offer an interest subsidy. Interest on unsubsidized loans accrues as soon as the funds are disbursed, and you're responsible for repaying all interest charges from start to finish.

You have the option to defer your student loan and interest payments until after your grace period. However, if you choose to defer the interest, it can be added to your principal loan amount when you start repayment. This is called capitalization, and it means you'll essentially pay interest on your interest.

Unsubsidized loans are also open to both undergraduate and graduate-level students. Unlike the need-based requirement for subsidized loans, unsubsidized student loans don't require students to demonstrate financial need. Finally, borrowing limits are generally higher for unsubsidized loans.

Eligibility

To qualify for a federal Direct Subsidized Loan, you must be an undergraduate student who's enrolled at a participating school at least half-time. You must also be enrolled in a program that yields a degree or certification by the school.

Your school must determine that you have financial need, based on the information you provided on your Free Application for Federal Student Aid (FAFSA) and your school's certified cost of attendance.

Borrowing limits

How much you're allowed to borrow depends on your year in your undergraduate program.

Once you've reached a total of $23,000 in unpaid Direct Subsidized Loans over your years of study, you've reached the maximum borrowing cap for this loan type. However, you might be eligible for future subsidized loan awards by repaying some of the outstanding subsidized loans to get you below the aggregate borrowing limit.

Another option is choosing other types of education loans, like Direct Unsubsidized Loans, Direct PLUS Loans, or private student loans.

Repayment options

Repaying your subsidized student loan is typically required after a six-month grace period following your departure from school, or after your deferment period is complete. The Standard Repayment Plan is the default repayment plan for all federal Direct Loans. This option is the least costly; it breaks your loan debt into 120 fixed monthly payments over 10 years.

However, you can choose other payment plans, like the Graduated Repayment Plan or Extended Repayment Plan. You can also access income-driven repayment (IDR) plans, which calculate your monthly payment using your family size and income.

Depending on the plan, your payments are kept to 5%, 10%, 15%, or 20% of your discretionary income. Some borrowers even have a monthly payment of $0 after enrolling in an IDR plan.

How to apply

To apply for a subsidized Direct Loan, complete a Free Application for Federal Student Aid (FAFSA). This is the universal form for federal financial aid, including subsidized loans. Additionally, other sources of aid awards - like grants and scholarships sponsored by your state, city, and other entities - often use your FAFSA to determine your eligibility.

If your school finds that you qualify for a subsidized student loan, you'll see it, along with the loan amount offered, listed in your financial aid package. Follow the steps to accept the loan. You can accept all, or a portion, of the subsidized student loan amount if desired.

Other types of student loans

If you don't qualify for subsidized student loans, or you need additional loan aid after maximizing your subsidized loans, you have other options to consider, including:

• Unsubsidized federal loans: Direct Unsubsidized Loans can be a great second choice, especially since they have the same interest rate for undergraduates as federal subsidized loans. Similarly, dependent undergraduate students can discuss whether a parent is willing to borrow a parent PLUS loan on the student's behalf.
• Private student loans: If you've maximized federal student loan opportunities for aid, private student loans can help fill the gap. These loans are offered by private lenders, and lenders set their own eligibility criteria, including credit and income requirements. This means that most dependent undergraduate students won't qualify on their own, and will need a cosigner. Interest rates can be fixed or variable, and repayment options vary.

Subsidized student loan FAQ

Do subsidized loans qualify for forgiveness?

Yes. Both subsidized and unsubsidized Direct Loans are eligible for various forms of federal loan forgiveness.

What are the pros and cons of subsidized loans?

The advantages of a federally subsidized student loan include the fixed interest rate and the interest subsidy. With this subsidy, the Department of Education pays for accrued interest while you're in school, during your grace period, and during periods of deferment. The downsides of a subsidized loan are that it's only accessible to undergraduate students who have financial need, and there are annual and aggregate borrowing caps.

Should I get a subsidized student loan?

If you need to borrow loans to pay for school and qualify for a Direct Subsidized Loan, maximize that offer before moving on to other loan types, like Direct Unsubsidized Loans or private student loans. Subsidized loans help you reduce the interest you'll pay on your loans overall, and your school automatically determines your eligibility if you submit a FAFSA.

Is a subsidized or unsubsidized loan better?

A subsidized student loan is a better option. It reduces your out-of-pocket cost for interest that accrues during school, in the first six months after leaving school, and during periods of deferment. During these periods, the federal government pays for interest that accrues. When you start repayment, you're repaying the original loan balance, not a higher balance with capitalized interest.