Subsidized student loans: A complete overview

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:

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.

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.

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:

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.