What Is a Subsidized Loan?

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Federal student loans come in two main types: subsidized and unsubsidized. A subsidized loan is a student loan for undergraduate students who demonstrate financial need. This type of loan doesn't accrue interest the same way other loans do because the government temporarily covers interest costs. To qualify for a subsidized loan, also called a direct subsidized loan, you have to fill out the Free Application for Federal Student Aid (FAFSA).

Subsidized vs. Unsubsidized Loans

Both subsidized and unsubsidized loans are offered through the federal government, but there are some key differences between them.

  • Subsidized loans are only available to undergraduate students, while unsubsidized loans are open to undergraduates, graduates and those seeking professional degrees.
  • Subsidized loans require students to demonstrate financial need, while unsubsidized loans do not. Because subsidized loans are intended for students who need greater financial assistance, they come with additional financial perks.
  • With subsidized loans, the federal government pays (or "subsidizes") interest that accrues while the student is enrolled in school at least half time, during the six-month grace period after the student leaves school and during loan deferment.

Unsubsidized loans, on the other hand, begin accruing interest immediately. Interest that is not paid before the grace period or loan deferment period ends will be capitalized (added to the principal loan amount) and will then accrue additional interest. Private loans also begin to accrue interest immediately.

These two loans do have some things in common, though. Neither require a credit check, and the interest rate is the same on subsidized and unsubsidized loans for undergraduate students (unsubsidized loans have a higher interest rate for graduate or professional students).

Pros and Cons of Subsidized Loans

Subsidized loans come with some great benefits:

  • Because the federal government pays the interest during the periods noted above, subsidized loans will save you money.
  • They offer flexible repayment options you won't find with private loans.
  • You'll pay lower interest rates on these loans than on comparable private student loans.

But they also have some drawbacks you should be aware of:

  • You're limited in how much you can borrow in subsidized loans each year and in total. Your school determines your maximum loan amount based on federal limits (see below), your financial need and your year in school. If you need more than the maximum amount, you can take out unsubsidized or private loans to cover the difference.
  • They're only available for undergrads, so graduate students have to look elsewhere.
  • Financial need must be demonstrated to qualify, so you may not be eligible if your parents' income (or your own, if you are not considered a dependent) is too high.

How Much Can I Borrow With a Subsidized Loan?

The amount you can borrow with a subsidized student loan is determined by your school, and the amount can't exceed your financial need. The amount you can borrow each year also depends on your year in school and your dependency status. The following chart shows the annual and aggregate limits for subsidized loans as determined by the U.S. Department of Education.

Borrowing Limits for Subsidized Loans
YearDependent studentsIndependent students
First-year undergraduate$3,500$3,500
Second-year undergraduate$4,500$4,500
Third-year undergraduate and beyond annual loan limit$5,500$5,500
Graduate studentNot applicableNot applicable
Subsidized aggregate loan limit$23,000$23,000

How to Apply for a Subsidized Student Loan

To qualify for a subsidized student loan, the government requires you meet the following guidelines:

  • Be a U.S. citizen, national or permanent resident
  • Be enrolled in school at least half time
  • Never have defaulted or owe a refund to any previous student loan or aid
  • Stay in good academic standing
  • Have financial need

To apply for a subsidized student loan, you'll first need to fill out the FAFSA. Once the federal government and your school review your application, you will receive an award letter from your school's financial aid office outlining the amount of aid you qualify for and whether you're eligible for a subsidized loan.

If you decide to accept the loan, you will sign a promissory note in which you agree to the loan's terms. First-time borrowers will also have to complete online student loan counseling that explains their financial obligations.

Your college will apply the loan funds to your school account to cover education-related costs such as tuition, fees, and room and board. If any money is left over after that, it will be returned to you, with the stipulation that you must use it for education expenses.

Are There Fees for a Subsidized Loan?

Federal subsidized loans do come with some fees. You'll pay a loan fee based on a percentage of the loan amount, which is deducted from each payout. According to the most recent data, loans disbursed on or after October 1, 2019, and before October 1, 2020, had a loan fee of 1.059% (the same fee applies to both subsidized and unsubsidized loans).

Just like with any loan, you'll also pay interest in exchange for borrowing money. The interest rate on subsidized loans disbursed on or after July 1, 2019, and before July 1, 2020, is 4.53%.

When Do I Start Paying Off Subsidized Loans?

With subsidized student loans, as long as you're in school at least half time, you don't owe anything on your loans.

After you leave school, your loan servicer will contact you and let you know when your first payment is due and how to pay. It's best to start paying the loans back as soon as possible and pay more than the minimum if you can.

If you make minimum payments, it can take many years to be free of your loans. If you're able to contribute more, you'll be done with them sooner—and you can reduce the overall cost of the loan since you won't be paying interest as long. If you want to make a larger payment, let your loan servicer know you want that extra amount applied to the current month's payment so they don't inadvertently add it to the next month's payment.

Some students aren't able to get by on subsidized loans alone and have to also take out unsubsidized federal loans or private loans. If you have multiple student loans, determine which have the largest balances and the highest interest rates. Anytime you are able to pay more than the minimum, put that extra money toward these more expensive loans since it will save you the most money over time.

Also, be aware that federal loans have several different repayment plans to choose from. While yours may come with one automatically, you can change plans for free at any time. Contact your loan servicer to find out which plan would work best for you or to change your plan.

Extra Credit

Taking out student loans can help you establish credit history, and making on-time loan repayments can improve your credit over time. Keeping an eye on your credit report, such as through Experian's free credit monitoring service, will help you track your progress as you pay back your loan, and will alert you to any changes in your credit file.