Need to borrow for college? Why subsidized student loans should be your first option

With subsidized loans, the federal government pays for your interest while you’re in school — saving you money.

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Subsidized student loans are generally cheaper to repay because the government pays for your interest while you’re in school. (Shutterstock)

If you need to borrow to fund college, your first choice for a loan should be an easy one: federal subsidized student loans. These loans offer more generous terms for borrowers than other options — saving you a substantial amount of money as you pay for your education. 

Here’s how federal subsidized student loans work and how you may be able to qualify for one.

If you’ve exhausted all your federal student loan options and need private loans to fill the gap, visit Credible to learn more about private student loans.

What are subsidized student loans?

Federal Direct Subsidized Loans are student loans that the U.S. Department of Education offers undergraduate students who demonstrate financial need. The main advantage of subsidized loans has to do with who pays interest at different times during the life of the loan. 

Generally, you’re responsible for interest on student loans as soon as the loan is paid out — even if you aren’t yet required to begin repaying the loan itself. This could be while you’re in school, in a grace period after graduation, or in loan deferment. With unsubsidized loans, this interest accumulates and is added to the total amount you’re required to pay back. 

With subsidized loans, the government actually pays your interest during these periods, potentially saving you thousands of dollars when you begin to repay the loan. This cost savings makes Direct Subsidized Loans a clear first choice for student borrowers.

How do subsidized student loans work?

To be eligible for a federal subsidized loan, you must be enrolled at least half-time in a college or university that participates in the government’s Direct Loan Program. 

You must also demonstrate financial need, as determined by the information on your family’s finances that you provide in the Free Application for Federal Student Aid (FAFSA). Financial need is the difference between the cost of attendance of your school and the amount of money your family is considered able to afford to pay, called your expected family contribution (EFC).

Your school will determine how much you can borrow in subsidized loans. But these loans do have maximums that are based on your year in school. The subsidized loan limits are:

  • $3,500 for first-year undergraduates
  • $4,500 for second-year undergraduates
  • $5,500 for third-year undergraduates and subsequent years

The amount you can borrow in subsidized loans is limited to $23,000. The federal government pays the interest on subsidized loans while you are:

  • Enrolled in school at least half-time
  • In the grace period (the first six months after leaving school)
  • In loan deferment

You must also pay a loan fee on Direct Subsidized Loans, currently set at just over 1% of the loan amount. This fee is deducted from the money disbursed to your school.


Subsidized vs. unsubsidized student loans

Direct Subsidized Loans and Direct Unsubsidized Loans have a number of differences that make subsidized loans a better deal overall. But it’s harder to qualify for a subsidized loan.

Direct Subsidized Loans are available only to undergraduate students, while Direct Unsubsidized Loans can be taken out by undergraduate and graduate students. Subsidized loans are only available if you demonstrate financial need, while unsubsidized loans don’t require financial need.

With unsubsidized loans, you’re responsible for paying interest that accumulates while you’re in school, in the grace period, or in deferment. The government pays the interest during these periods with subsidized loans.

Both subsidized and unsubsidized loans have limits to how much you can borrow, and both require you to be enrolled at least half-time.

Subsidized vs. Direct PLUS Loans

A third type of federal direct student loan is the Direct PLUS Loan. These loans are for parents of dependent undergraduate students, or for graduate and professional school students. They may also be called Parent PLUS or Grad PLUS Loans, depending on which category you fall in.

Interest rates on PLUS Loans are higher than on subsidized and unsubsidized loans. Like an unsubsidized loan, PLUS Loan borrowers are responsible for the interest while the student is in school, in a grace period, or while loans are in deferment.

Who qualifies for subsidized student loans?

To receive subsidized student loans, you must first be eligible for federal student aid. To meet those criteria, you must:

  • Have a high school diploma or equivalent, or complete a high school education via homeschool
  • Be a U.S. citizen, U.S. national, U.S. permanent resident, or fall under a limited number of immigrant categories
  • Have a valid Social Security number, in most cases

But not all college attendees who are able to receive federal student aid will qualify for subsidized student loans. In order to be eligible, you must also:

  • Demonstrate financial need
  • Be an undergraduate student
  • Enroll in a degree or certificate program at least half-time
  • Complete entrance counseling

If you aren’t eligible for federal student aid, you can compare private student loan rates using Credible, and it won’t affect your credit score.

How do you get a subsidized student loan?

Getting a subsidized student loan is a fairly straightforward process. Here are the steps you should follow to take out a subsidized loan:

1. Fill out the FAFSA

The Free Application for Federal Student Aid is the form schools use to determine what federal grants and loans you’re eligible to receive. You can fill out the FAFSA online or via mobile app, or you can print and mail in a hard copy or request that a hard copy be mailed to you. 

The FAFSA is available starting Oct. 1 for the subsequent school year, but you should complete it as soon as possible. Be sure to pay close attention to deadlines set by your school for completing the form. You can look up these deadlines on the Federal Student Aid website.


2. Receive a financial aid package from your school

Based on the information in your FAFSA, your school will offer you a financial aid package that will cover the cost of attendance of your school, minus the contribution expected from you and your family. If you qualify, Direct Subsidized Loans will generally be included as part of this package. If your package doesn’t include them, contact your school’s financial aid office to find out why.

3. Accept your financial aid

Based on the offer from your school, you can choose which forms of financial aid to accept or reject from your financial aid package. In general, you want to accept scholarships and grants first, then federal work-study, then subsidized loans. 

After that, you can consider unsubsidized loans. Be sure not to borrow more money than you need. Your school will let you know how to inform the financial aid office which forms of assistance you’re accepting. For loans, you may also need to take additional steps, like signing a promissory note with your lender.

4. Remain eligible for financial aid

To stay eligible for subsidized student loans, you’ll need to make sustained academic progress toward your degree or certificate. Your school can let you know what GPA you’ll need to maintain and how many credits you need to complete each year. Also keep in mind that if you fall below half-time enrollment, you’ll need to begin paying back your loan.

How long does it take to get a subsidized student loan?

You’ll typically receive your student loan funds from your school each semester or quarter, depending on how the school handles the academic year. If you’re a first-year student and first-time borrower, you may need to wait 30 days after the beginning of the school year to receive loan money.

How are subsidized student loans distributed?

Subsidized student loans are disbursed first to your school. The school will apply money from the loan toward your cost of attendance. Any money left over will then be sent to you, but you can only use it for education expenses.

How do you repay subsidized student loans?

You must repay federal subsidized loans after you leave school or drop below half-time enrollment. First, you’ll have a six-month grace period in which you don’t have to make payments — allowing you time to get established in a job and set a budget. During this time, your loan servicer will give you instructions on how to make your payments and let you know when your first payment is due. 

Your loan servicer can also help you determine which repayment plan is right for you. The default is the Standard Repayment Plan, in which you pay off your loan with regular, fixed monthly payments over 10 years. All borrowers are eligible for this plan.

Other repayment plans you may consider include:

  • Graduated Repayment Plan — With this plan, your payments start off lower but gradually increase over time — usually every two years. You’ll still pay off the loan within 10 years.
  • Extended Repayment Plan — If you have more than $30,000 in federal Direct Loans, you may qualify for a longer time period to pay them off. These plans can extend as long as 25 years. Keep in mind that extending your repayment term will mean paying more interest over the life of your loan.
  • Income-driven repayment plans — The government offers four income-driven repayment plans for subsidized loans, in which your monthly payment is based on how much you earn and the size of your family. Your payment amount will be 10%, 15%, or 20% of your monthly discretionary income based on the specific plan you choose, generally as long as this figure falls below what you’d pay on the Standard Repayment Plan. Your payment amount will generally reset every year, and your remaining balance may be forgiven after 20 or 25 years depending on the type of loan you have and when you took it out.


What to do after you’ve exhausted your federal loan options

Depending on the cost of attendance of your chosen school, federal student loans may not cover all your expenses. If this is the case, you may turn to private student loans to fill in the gap. Private lenders — including banks, credit unions, and online lenders — offer private student loans. 

You may need to meet credit score requirements or have a cosigner (often your parents) to help you qualify for these loans. Private student loans typically have less generous repayment plan options, though interest rates may be lower depending on your financial situation.

Credible makes it easy to compare private student loan rates from various lenders in minutes.