Subsidized student loans: A complete overview

Subsidized student loans are federal loans available to undergraduates who demonstrate financial need.

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By Christy Bieber

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Christy Bieber

Freelance writer, Credible

Christy Bieber has spent more than 16 years in personal finance. She's an expert on student loans, debt, social security, and mortgages. Her work has been published by The Motley Fool, CBS News, and USA Today.

Updated May 29, 2024, 7:08 PM EDT

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Written by

Renee Fleck

Editor, Credible

Renee Fleck is a student loans editor with over five years of experience. Her work has been featured in Fast Company, Morning Brew, and Sidebar.io, among other online publications. She is fluent in Spanish and French and enjoys traveling to new places.

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Federal subsidized student loans offer a critical financial resource for many low-income students heading into higher education. In 2022-23, these loans accounted for 16% of all student loans issued — federal and private — according to College Board. Here’s what you need to know. 

Subsidized loan key facts

  • Best for: Undergraduate students with financial need who’ve exhausted their grant and scholarship options 
  • Interest rate: 5.50% for loans issued on or after July 1, 2023, and before July 1, 2024
  • Loan fee: 1.057% for loans disbursed on or after Oct. 1, 2020
  • Total borrowing limit: Up to $23,000 (aggregate)
  • Repayment options: Standard, Graduated, Extended, and income-driven repayment plans available

What is a subsidized student loan? 

A Direct Subsidized Loan is one of several types of student loans issued by the U.S. Department of Education. It’s considered the most affordable student loan option because it comes with a low fixed interest rate compared to other federal and private student loans. 

One of its major benefits is that the government covers your interest costs while you’re in school, during the grace period, and during other eligible periods of deferment. The downside is that subsidized loans are only available to undergraduate students with financial need. 

Subsidized vs. unsubsidized loans

The main difference between subsidized and unsubsidized loans is the interest subsidy. With unsubsidized loans, you’re responsible for paying all of the interest that accrues from the day the loan is disbursed. Subsidized loans, which cover interest charges while you’re in school, are generally a better option if you qualify.

Below is a quick overview of subsidized vs. unsubsidized loans to help you understand their key differences:

Subsidized loans
Unsubsidized loans
Eligible students
Undergraduates with demonstrated financial need
Undergraduate and graduate students
Interest rate (2023-24)
5.50%
5.50% for undergraduates; 7.05% for graduates
Who pays interest?
Government pays interest while in school, during the grace period, and during deferment
Borrower pays all interest that accrues from the date of disbursement
Borrowing limits
Lower loan limits
Higher loan limits

Who qualifies for a subsidized loan?

Basic eligibility requirements for a subsidized loan include being a U.S. citizen or eligible noncitizen with a valid Social Security number and high school diploma or equivalent. Additionally, you must:

  • Be enrolled in an undergraduate degree or certificate program: While graduate and professional students can qualify for other federal student loans, subsidized loans are not an option for them.
  • Demonstrate financial need: This is assessed when you complete your Free Application for Federal Student Aid (FAFSA). Factors include your Student AId Index (formerly known as your Expected Family Contribution), your school's cost of attendance, and any other financial aid you’ve received.
  • Be enrolled at least half-time: The school you’re enrolled in must participate in the Direct Loan program.

How much can I borrow?

The amount you can borrow in subsidized student loans annually depends on your academic year. However, there is also a $23,000 lifetime limit with subsidized loans.

Year in school
Maximum loan limit
1st year
$3,500
2nd year
$4,500
3rd year and beyond
$5,500
Aggregate loan limit
$23,000
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Tip:

If you need additional funding after maxing out subsidized loans, consider unsubsidized loans next. These are the next most affordable option for student loans.

Interest rates and fees

Interest rates for Direct Subsidized and Unsubsidized Loans are set by the government once a year. Rates are based on when you borrow, and these rates are fixed, so they’ll never change. Currently rates and fees for subsidized student loans are set at: 

  • Interest rate: 5.50% for loans disbursed on or after July 1, 2023, and before July 1, 2024
  • Loan fee: 1.057% for loans disbursed on or after Oct. 1, 2020, and before Oct. 1, 2024

Unlike private student loans, your credit score and financial credentials do not impact the rate you'll pay for your subsidized loan.

Repaying subsidized student loans

You don’t have to begin making payments on Direct Subsidized Loans until six months after you leave school or drop below half-time enrollment.

When you’re in school or when your loans are in deferment, the government subsidizes your interest. So, unlike unsubsidized student loans, you won’t graduate with a balance larger than the amount you borrowed, even if you didn’t make any payments while in school.

When repayment begins, you have a choice of several repayment plans, including:

  • Standard: With the Standard Repayment plan, you make fixed payments for 10 years.
  • Graduated: Loans are repaid over 10 years (or 10 to 30 if you consolidate loans). Payments start lower and go up every 2 years.
  • Extended: You must have more than $30,000 in Direct Loans to qualify. Payments can be fixed or graduated and are designed to repay your loan in 25 years.
  • Income-driven: There are four income-driven repayment (IDR) plans that allow you to make payments between 10% and 20% of your discretionary income. You can have the remaining loan balance forgiven after 10 to 25 years.
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Keep in mind:

When choosing a repayment plan, keep in mind that a longer term means you’ll pay more interest over time.

Pros and cons of subsidized loans 

Subsidized loans are considered the most affordable type of student loan, but they have some important benefits and drawbacks to be aware of before borrowing:

Pros
Cons
Low fixed interest rates
There’s a financial need requirement to qualify
No interest charges while you’re in school and during the grace period
Not available to graduate students
Interest doesn’t accrue during periods of deferment
Low annual borrowing limits

How to apply for a subsidized loan

To apply for a Direct Subsidized Loan, you'll need to complete the Free Application for Federal Student Aid (FAFSA). You can complete this application online at Student Aid.gov. All students are encouraged to complete the FAFSA, and it typically takes less than an hour to do so.

You’ll need to provide information about your income and assets to complete this form. You'll also need to provide information about your parents if you are a dependent undergraduate. Your FAFSA will be sent to the schools you apply to, and the schools you’ve been accepted to will send a financial aid package that may include Direct Subsidized Loans (if you're eligible for them).

When will I receive my loan? 

Your school distributes your federal student loans, including Direct Subsidized Loans. Usually, this happens once per term, which could be once a semester, trimester, or quarter — but almost all students get their loans in at least two payments during the year.

You must also complete entrance counseling before your school disburses your loans to you if you are a first-time borrower. As a first-year undergrad student, you may have to wait 30 days from the first day of your enrollment period before your school gives you any loan money that is due to you.

Do subsidized loans qualify for forgiveness? 

Direct Subsidized Loans are eligible for student loan forgiveness through the Department of Education's programs, including Public Service Loan Forgiveness (PSLF) and forgiveness under income-driven plans.

The PSLF program discharges your remaining student debt after making 120 qualifying payments while working full-time in an eligible public service job. If you’re not eligible for PSLF, you can still pursue loan forgiveness through an income-driven repayment plan. These plans forgive any remaining loan balance after 10 to 25 years of payments, depending on your plan.

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Meet the contributor:
Christy Bieber
Christy Bieber

Christy Bieber has spent more than 16 years in personal finance. She's an expert on student loans, debt, social security, and mortgages. Her work has been published by The Motley Fool, CBS News, and USA Today.

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Fox Money is a property of Credible Operations, Inc., which is majority-owned indirectly by Fox Corporation. This material may not be published, broadcast, rewritten, or redistributed. All rights reserved. Use of this website (including any and all parts and components) constitutes your acceptance of Fox's Terms of Use and Updated Privacy Policy | Your Privacy Choices.