The Federal Direct Loan Program offers both subsidized and unsubsidized loans to college students nationwide. While borrowers are responsible for all accrued interest on unsubsidized debt, those who qualify for a subsidized student loan can have the government pay for accrued interest during certain periods.
That difference offers substantial benefits to subsidized loan borrowers, and more than 30 million students had received these loans by the end of 2022. See who’s eligible for this type of debt and the pros and cons that come with these loans.
- What are subsidized student loans?
- How do subsidized student loans work?
- Pros, cons of subsidized student loans
- Refinancing subsidized student loans
What are subsidized student loans?
Direct Subsidized Loans are a type of federal student loan offered by the U.S. Department of Education.
The main benefit of a subsidized student loan is that the Department of Education pays the interest on the loan:
- While you’re enrolled in school at least half-time
- For the first six months after you leave school
- During any deferment periods
This means interest won’t be added to your loan balance during these periods, which can save you a substantial amount of money.
Eligibility
These loans are only available to undergraduate students who demonstrate financial need. Your need is determined by the information you provide on the Free Application for Federal Student Aid (FAFSA).
In addition to financial need, you must meet the basic financial aid eligibility requirements to borrow a subsidized loan. To access any federal student aid, you must:
- Be a U.S. citizen or eligible noncitizen
- Have a valid Social Security number
- Be enrolled at least half-time in an eligible degree or certificate program
- Maintain satisfactory academic progress
If you don’t qualify for subsidized student loans, you may be eligible for Federal Direct Unsubsidized Loans instead. These work similarly to subsidized loans, but you’re responsible for all interest that accrues. However, these loans don’t carry income requirements and are easier to qualify for.
How do subsidized student loans work?
Your school’s financial aid office will determine your eligibility for a subsidized student loan and how much you can borrow. You just need to complete the FAFSA annually.
Once your information is received, your school will:
- Determine your cost of attendance. This includes costs for tuition, fees, room and board, books, supplies, and other eligible expenses.
- Calculate your Expected Family Contribution (EFC). This is the amount your household is expected to be able to pay toward your education. Your EFC isn’t how much your family will actually pay — it’s just a metric the school uses to determine how much financial aid you qualify for.
- Subtract your EFC from your cost of attendance. This is how much you can receive in need-based aid.
For example, if your total cost of attendance is $20,000 for the year and your expected family contribution is $12,000, you could be eligible for up to $8,000 in need-based aid.
Subsidized loan limits
Keep in mind that you may not be able to borrow the full amount you qualify for in subsidized loans because there are annual and lifetime limits on the amount you can borrow.
| Year in school | Subsidized loan limits |
|---|---|
| First-year undergraduate | $3,500 |
| Second-year undergraduate | $4,500 |
| Third-year and beyond undergraduate | $5,500 |
| Lifetime undergraduate limit | $23,000 |
You may qualify for other forms of need-based aid, or you can take out unsubsidized federal student loans or private student loans to make up the difference.
| Note: Prior to 2012, graduate students were eligible for subsidized student loans and had a lifetime limit of $65,000. Graduate students no longer qualify for subsidized loans. |
Pros and cons of subsidized student loans
Subsidized student loans offer several benefits to help students finance their education without taking on too much debt, but they come with a few downsides, too.
Pros
- No interest accrues while you’re in school. The federal government pays the interest that accumulates on the loan while you’re enrolled in school at least half-time and for six months afterward, meaning your total loan balance won’t increase during this time.
- Fixed interest rates. The interest rate on Direct Subsidized Loans is fixed at 4.99% for the 2022-23 school year. That may be lower than the rate you’d pay on a private student loan, and because it’s fixed for the life of the loan, you don’t have to worry about your rate going up.
- No credit check or cosigner required. You don’t need a credit check or cosigner to qualify for a federal subsidized loan.
- Flexible repayment options. The standard repayment plan for most federal student loans is ten years. However, the Department of Education offers several alternative repayment options, including income-driven repayment plans, that can help make your monthly payments more affordable.
- Access to deferral and forbearance options. If you decide to return to school or face a financial hardship that makes it tough to pay your loans, you may be able to pause your payments temporarily. You won’t pay any interest during deferment periods.
- Potential loan forgiveness. Your federal subsidized loans may qualify for a student loan forgiveness program.
Cons
- Eligibility restrictions. You won’t qualify for a subsidized loan if you don’t meet the income requirements or attend school at least half-time.
- Borrowing limits. The amount of money you can borrow each year is limited, and it may not cover your full financial need.
- Origination fees. All types of federal student loans come with origination fees — the 2022-23 fee for subsidized loans is 1.057%. In comparison, most private student loans do not charge origination fees.
- Not available for graduate or professional degrees. Subsidized loans are only available for undergraduate students. If you’re pursuing a graduate or professional degree, you may need to use unsubsidized or private student loans.
Refinancing subsidized student loans
Refinancing student loans can be a great way to reduce your interest rate and save money over the life of your loan. But when refinancing a subsidized student loan, it’s essential to consider all the potential benefits and drawbacks.
The primary benefit of refinancing student loans is that you could potentially get a lower interest rate than you’re currently paying. Additionally, refinancing may allow you to consolidate multiple loans into one payment and extend your repayment period, simplifying your finances and reducing your monthly payments.
However, when you refinance federal student loans with a private student loan, you lose many of the protections that come with them, including income-driven repayment plans, student loan forgiveness programs, and deferral and forbearance options.
If you decide to return to school later — perhaps to pursue a graduate degree — you’ll no longer be eligible for the interest subsidy provided by the federal government. This means that you’ll be responsible for all the accrued interest on the loan, and your total loan balance may increase over time.
If you’re comfortable giving up those benefits, you’ll find many lenders that offer varying terms, fees, and interest rates for refinancing. To make sure you get the most out of your loan and save money, shop around among available lenders to find the best terms and rates for your situation.