How subsidized student loans work

May 2024 · 6 minute read
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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?

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:

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:

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 schoolSubsidized 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

    Cons

    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.

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