A subsidized loan, or direct subsidized loan, is a federal loan for undergraduate college students who are still in school, and need for help to pay for tuition and related expenses. To qualify for a subsidized loan you first need to visit and complete the Free Application for Federal Student Aid (FAFSA).
Applying for the FAFSA is free and if you qualify for a subsidized loan your school will notify you. More than 20 million FAFSAs are submitted each year resulting in more than $120 billion in federal grants, loans and work-study funds to help students pay for school, according to the Department of Education.
Subsidized vs. Unsubsidized Loans
The difference between a subsidized loan and an unsubsidized loan is that the U.S. Department of Education pays the interest on a subsidized loan while the student is in school (provided the student is attending school at least half-time), and for the first six months after graduating (a grace period), and during a deferment period. The government will not pay the interest on an unsubsidized loan.
If you decide to take out a private student loan or an unsubsidized federal loan, then you will pay all the interest even while you are in school.
Also, subsidized loans are only available to undergraduate students while unsubsidized loans are available to both undergraduates and graduate or professional degree students. For an unsubsidized loan, you are not required to show a financial need in order to receive or be approved for the loan.
What Are the Benefits of Subsidized Loans?
The main benefit of a subsidized student loan is that the government pays the interest on your loan as long as you are a student enrolled at least on a half-time status. The interest is also paid for during the deferment and forbearance period, as well as on certain repayment plans, by the government. Additional no payments are required until after the first six months of graduation.
What Are the Drawbacks of Subsidized Loans?
The downsides of a subsidized loan are that you are limited to the amount that you can take out. The guidelines that determine the amount of money that you can receive depending on your school and what year you are in for school.
Most students are limited to $3,500 in subsidized student loans for their first year of school, $4,500 for their second year, and $5,500 for their third and fourth years according to the Department of Education. If you are enrolled in a 4-year degree program, the maximum period that you can receive subsidized loans is six years. If you are enrolled in a two-year associate degree program, the maximum period is three years.
With an unsubsidized loan, you also accept the responsibility of paying the interest starting from the first day you take out the loan. If you don't make payments on the loan the interest is added to that total amount. The interest that goes unpaid will build over time.
One downside that comes with both subsidized and unsubsidized loans is that you are taking on debt. When you take on debt you must accept the risks that come with that decision. One of those risks can be defaulting on the loan. In the case of a federal loan, the government could garnish your wages up to 15% of your income or take your income tax refund as payment. With federal student loans, there is no statute of limitation, and they are generally non-dischargeable in bankruptcy.
How Much Can I Borrow With a Subsidized Loan?
The amount that you can borrow with a subsidized loan is determined by your school and that amount cannot exceed your financial need. The amount that you are allowed to borrow each year also depends on what year you are 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.
|Year||Dependent Students||Independent Students|
|First-Year Undergraduate Annual Loan Limit||$3,500||$3,500|
|Second-Year Undergraduate Annual Loan Limit||$4,500||$4,500|
|Third-Year Undergraduate and Beyond Annual Loan Limit||$5,500||$5,500|
|Graduate Students Annual Loan Limit||Not Applicable||Not Applicable|
|Subsidized Aggregate Loan Limit||$23,000||$23,000|
How to Qualify for a Subsidized Student Loan
To qualify you must be meet the following guidelines:
- Be a U.S. citizen, national, or permanent resident
- Be enrolled at least half-time
- Never have defaulted or owe a refund to any previous student loan or aid
- Stay in good academic standing
- You have a financial need
What Are the Interest Rates for a Subsidized Loan?
The interest rates for direct subsidized student loans that were disbursed after July 1, 2017, and before July 1, 2018, are 4.45%.
Are There Fees for a Subsidized Loan?
Yes, there is a fee for a subsidized loan which is a percentage of the loan amount and is deducted from each loan payout. That percentage will vary depending on when the loan is first paid out. The subsidized loan fee for disbursement data that are after Oct. 1, 2017, and before Oct. 1, 2018, is 1.066%.
The average student loan debt is $34,000 according to Experian. Before you decide to take out a loan for school you should make sure that you read about student loans along with the resources that are associated with them.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on January 4, 2018, and has been updated.