What is a subsidized loan? If you’re not sure of the answer, you’re not alone. Applying for college is difficult enough, but finding a way to pay for your college tuition, room and board, and other expenses can be even harder. The FAFSA (free application for federal student aid) allows you to streamline the process and apply for multiple types of federal financial aid at once. One of these is called a subsidized loan. You might also hear them referred to as Direct Subsidized Loans or Subsidized Stafford Loans.
What is a Subsidized Loan?
A subsidy is an amount of money granted by the government to help lower the price of a commodity or service. In the case of student financial aid, a subsidy is a sum of money granted by the federal government to help pay for a portion of your loan. Subsidized student loans are granted only to undergraduate students and disbursed based on financial need.
How Much Does the Government Pay?
With a subsidized student loan, the U.S. Department of Education pays the interest on your loan while you’re in school at least half-time, and for the first six months after you leave school. This six months is referred to as a Grace Period. The Department will also pay the interest on your subsidized loan during periods of deferment. Outside of these time periods, you are responsible for paying the interest on your loan. As with any type of loan, you’re also responsible for repaying the entirety of the borrowed amount.
Do I Qualify for a Subsidized Loan?
Unlike with private loans, a credit check, cosigner, and/or separate loan application aside from the FAFSA are not required to obtain a subsidized loan. However, you must meet the following criteria to qualify:
- Be an undergraduate student, enrolled at least half-time in an eligible degree or certificate program at a participating institution
- Have received your high school diploma, GED, or equivalent
- Not be in default on any existing federal student loans
- Meet the general eligibility requirements for federal student aid
- Be a U.S. citizen, national, or eligible non-citizen
- Demonstrate financial need as determined by the FAFSA
Difference Between Subsidized and Unsubsidized Loans
The government doesn’t only offer financial aid to students in financial need. If you don’t qualify for a subsidized loan, you might still qualify for an unsubsidized loan (known as Direct Unsubsidized Loans or Unsubsidized Stafford Loans).
What is an Unsubsidized Student Loan?
An unsubsidized loan is a loan disbursed by the federal government for which you are responsible for paying interest.
How Are They Different?
- Government Subsidy – The main difference between subsidized and unsubsidized loans is that with an unsubsidized loan, you are responsible for the repayment of your loan plus any interest accrued. With a subsidized loan, the government will help pay some of the interest on your loan.
- Financial Need Requirement – Because you don’t have to demonstrate financial need to qualify for an unsubsidized student loan, they are usually much easier to obtain.
- Student Level Requirement – Unsubsidized loans are also available to both undergraduate and graduate students, while only undergraduates are eligible for subsidized loans.
- Maximum Eligibility Period – Subsidized student loans are only available to you for a certain amount of time. As of 2018, the maximum eligibility period is 150% of the time it should take to graduate from the program in which you’re enrolled. Unsubsidized loans do not have a maximum eligibility period.
- Borrowing Limits – In general, the amounts you can borrow as a subsidized loan are more limited than what you can borrow as an unsubsidized loan.
How Are They Similar?
- Enrollment Requirement – To qualify for either a subsidized or unsubsidized student loan, you must be enrolled at an accredited institution at least half-time, in a program that will lead to a degree.
- Origination Fees – Unsubsidized and subsidized loans both have origination fees, which are fees for processing your application and disbursing your loan. The fee is calculated as a percentage of the amount you borrow, and it applies each time you reapply.
- Grace Period – Both subsidized and unsubsidized student loans allow students a grace period: a period of time (usually six months) after they graduate during which no payments are required.
Here is an in-depth look into the difference between a Subsidized vs. Unsubsidized Student Loan.
Why Choose a Subsidized Loan
Both subsidized and unsubsidized student loans offer multiple benefits for you, as a student (or parent of a student), as compared to private loans. Whether you qualify for a subsidized loan or only an unsubsidized one, federal loans are likely your best choice to pay for some of your bigger college expenses, like tuition. If you have financial need and meet the eligibility requirements, a subsidized loan is your best option.
Federal loans offer you the option of a grace period, during which you do not have to make any payments on your loan. This is true of both subsidized and unsubsidized loans, but interest will accrue on your loan during a grace period if it is unsubsidized. If you need time to establish yourself in your career after college before you start making payments, a grace period can be a major benefit.
Federal loans also offer lower interest rates than private student loans. Even if your loan is unsubsidized, federal loans can reduce the amount of interest you’re responsible for. With a subsidized loan, your savings are even higher.
Flexible Repayment Plans
If you struggle to make payments after your grace period ends, the U.S. Department of Education may be able to help with one of several repayment plans.
Common Questions On Subsidized Loans
Are you required to pay back a subsidized loan?
Yes, you must pay back subsidized student loans. The government will pay back a part of the interest on the loan, but you as the borrower must still repay the amount you borrowed.
How much can I borrow?
The amount you’re eligible to borrow with a subsidized loan—if any—will be determined by your school. The total amount you can borrow (in subsidized and unsubsidized loans combined) depends on what year of school you are in, as well as whether you’re a dependent or independent student. The following are the limits for subsidized loans only, by year of study:
|Third Year & Beyond||$5,500||$5,500|
|Graduate & Professional||None||None|
|Sub & Unsub Aggregate Limits Undergrad||$23,000||$23,000|
What is the interest rate on Subsidized Loans?
|Loan Type||2017-18 Interest Rate||2016-17 Interest Rate||2015-16 Interest Rate|
|Direct Subsidized Loans (Undergraduate)||0.0445||0.0376||0.0429|
How do I apply for a subsidized student loan?
To apply for a subsidized loan, fill out and submit your FAFSA application. The schools on your list will determine whether you’re eligible for a subsidized or unsubsidized loan, and in what amount.
Can I get my student loan forgiven?
Some situations may allow you to get part or all of your student loan forgiven, discharged, or canceled. Check here to see if you qualify.
What does the government pay?
In a subsidized loan, the government pays the interest on your loan
- While you’re in school at least half-time
- During a six-month grace period after you leave school
- During periods of deferment
Conclusion: Should You Take A Subsidized Loan for College?
As with any type of loan, it’s important to understand the details of what you’re signing, and what is ahead of you in terms of repayment and interest. With that in mind, subsidized loans are a perfect solution for undergraduate students with financial need.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.