Subsidized Student Loans

The Department of Education offers the Direct Loan Program to help eligible students pay for the cost of attending college, trade or technical school, or career training programs. One of the loans offered through this program is the subsidized student loan, which is designed for undergraduates who demonstrate financial need.

What does subsidized mean for student loans? Simply that the government subsidizes or pays the interest on the loans in certain situations, specifically while you’re enrolled in school at least half-time, during your grace period, and during periods of deferment.

All of the federal student loan options differ; generally speaking, Direct Subsidized Loans tend to have better terms than the others. We’ll take a closer look at why that is and how to qualify for subsidized student loans.

In this guide:

• Overview of the Direct Subsidized Loan
• Who is eligible for subsidized student loans?
• How much can I borrow using subsidized student loans?
• What is the interest rate on subsidized student loans?
• Applying for subsidized student loans
• How are subsidized loans disbursed?
• What is the repayment process for subsidized loans?
• Can you cancel a subsidized student loan?
• Other helpful information on subsidized student loans

Overview of the Direct Subsidized Loan

Who is eligible for subsidized student loans?

The subsidized student loan program is open to eligible borrowers. Specifically, that means undergraduates with demonstrated financial need who also meet the basic eligibility requirements for federal student loans.

Generally, to be eligible for federally subsidized student loans (or other federal loans), you must:

• Be a U.S. citizen or eligible noncitizen with a valid Social Security number.
• Be enrolled or accepted into an eligible degree or certificate program on at least a half-time basis.
• Maintain satisfactory academic progress.
• Certify that you’re not in default on any federal student loans and don’t owe money on a federal student grant.
• Certify that you’ll only use federal loans for educational purposes.
• Show that you’re qualified to obtain a college or career school education.

You’ll need to complete the Free Application for Federal Student Aid (FAFSA) to apply for subsidized student loans. No credit check is required, so you won’t need a cosigner. If you’re filling out the FAFSA as a dependent student, you’ll need to provide financial information for yourself and your parents.

How much can I borrow using subsidized student loans?

The Department of Education allows schools to set borrowing limits for federally subsidized student loans.

The limit is based on your cost of attendance, which can include tuition and fees, room and board, and other expenses. The amount you’re eligible to receive through the subsidized student loan program can’t exceed your financial need.

There are annual limits for federal student loans, including subsidized loans. The limit that applies is based on whether you’re a dependent or independent student and your year of study. It’s possible that your loan amount may be less than the maximum allowed, based on your cost of attendance and need.

The aggregate loan limit for subsidized student loans is $23,000. If you max out your aggregate loan limit before graduating, there’s a workaround. You can pay down some of your outstanding loan debt, then borrow again up to your remaining aggregate loan limit.

What is the interest rate on subsidized student loans?

Federally subsidized student loans have low, fixed interest rates. The rate you’re assigned at the time you take out the loan is the rate you’ll have until the loan is paid off, assuming you don’t consolidate or refinance the amount you’ve borrowed.

The current rate for undergraduate borrowers who take out a subsidized student loan is 4.99%. Congress sets the interest rates on all federal student loans.

Again, the Department of Education pays the interest for you on your loans while you’re:

• Enrolled in school at least half-time
• Within the six-month grace period following graduation
• In deferment

Note that interest still accrues on subsidized student loans during forbearance periods, except for COVID-19 relief. So that’s something to keep in mind if you’re considering a forbearance because you’re struggling to manage your loan payments.

Aside from interest, there’s also a loan fee associated with subsidized student loans. The current origination fee is 1.057%. The loan fee is deducted from your loan amount before funds are disbursed.

Applying for subsidized student loans

As mentioned, you’ll need to complete the FAFSA to apply for federal student loans, including subsidized loans. You can submit your FAFSA online through the Department of Education website.

It’s important to note the deadline for submitting the FAFSA, as failing to get your application in on time could mean missing out on federal aid.

Your school uses the information you provide in the FAFSA to determine what type of federal student aid you qualify for and in what amount. Once a determination is made, you’ll receive an award letter with additional details about your aid package. You can then decide whether to accept the aid offered or not.

You’ll need to contact the school’s financial aid office to accept and complete any additional paperwork that might be required. You’ll also need to contact the financial aid office in order to appeal your award letter if you believe that the amount offered is insufficient to meet your needs.

How are subsidized loans disbursed?

If it’s your first time receiving federally subsidized student loans, you’ll need to complete entrance counseling before your funds can be disbursed. You can complete this counseling online through the Department of Education website.

Once you’ve completed counseling, you’ll need to sign a Master Promissory note. This essentially says that you agree to pay back the money you borrow. After all the necessary paperwork is complete, student loan funds can be disbursed.

The Department of Education sends money to your school to pay for tuition, fees, room and board, and other costs. If there are any remaining loan funds left over, the school will release them to you. This is done to ensure that all of the necessary costs of attendance are paid to the school first.

If you receive an overage check from the financial aid office, you don’t have to keep the money. You can apply it toward your student loan balance to reduce what you owe. But you can also use the money to cover your basic living expenses while in school.

First-year students may have to wait 30 days after the first day of the enrollment period for funds to be disbursed. You can ask your school’s financial aid office whether this rule applies to you. Also, note that after receiving the loan you may be contacted by the loan servicer for additional information.

What is the repayment process for subsidized loans?

For most federal loans, including those granted through the subsidized student loan program, repayment doesn’t begin until after your grace period ends.

The grace period is the six month window after you graduate, leave school, or drop below half-time enrollment. Again, the government pays the interest on subsidized loans during this time.

Certain things may affect your grace period. For example, if you leave school then re-enroll at least half-time before the end of the grace period, you’ll still receive a full six-month grace period when you stop attending school or your enrollment drops below half-time again.

By contrast, consolidating loans during the grace period will make loans repayable as soon as consolidation is complete.

If you’re not able to make your loan payments for any reason, the Department of Education advises contacting your loan servicer to discuss your options. Some of the possibilities for dealing with student loans include:

• Switching to an income-driven repayment plan to lower your monthly payments
• Consolidating loans to streamline payments
• Placing loans in deferment temporarily
• Requesting a forbearance

Again, just remember that the government does not pay the interest on your loans for you when they’re in forbearance.

Can you cancel a subsidized student loan?

It’s possible to cancel subsidized student loans for any reason before they’re disbursed. You’ll have to notify the school that you want to cancel all or part of the loan. You can also cancel loans after they’ve been disbursed, but only within certain time frames.

If you’re unsure whether you can cancel your loans or not, you can check your promissory note or contact the school. As to whether it makes sense to cancel the loans, that can depend on your situation.

For instance, you might decide to cancel your loans if you change your mind about attending college or plan to go to a different school. Or you might need to cancel part of the loan if the total amount is more than you need.

Before canceling, it’s important to be sure that you truly don’t need the loans. Otherwise, you may find it difficult to pay for school without them.

Other helpful information on subsidized student loans

Federal student loans, including subsidized loans, can be forgiven, canceled, or discharged under certain circumstances. These terms effectively mean the same thing – that you no longer have to pay the loans back – but the term that applies can depend on the situation.

For example, you may be eligible for Public Service Loan Forgiveness (PSLF) if you pursue a career in public service after graduation. A separate loan cancellation program exists for teachers and there’s also a discharge option for people who become permanently disabled.

If you’re interested in finding out whether your loans are eligible for forgiveness, cancellation, or discharge, the Federal Student Aid website is a helpful resource. You can also read our guide to the differences between subsidized and unsubsidized student loans or learn more about all the available federal student loans.