How Do Subsidized Student Loans Work

Subsidized student loans are a type of federal student aid that is available to students who demonstrate financial need and meet other eligibility requirements. These loans are different from unsubsidized loans in that they do not accumulate interest while the student is still in school. They also have lower interest rates than unsubsidized loans, and there are no fees for having an unsubsidized loan.

How Do Subsidized Student Loans Work?

The Federal Direct Student Loan Program provides subsidized student loans to undergraduate and graduate students who demonstrate financial need. To be eligible for this type of loan, you must be enrolled at least half-time at an accredited institution and demonstrate financial need by completing the Free Application for Federal Student Aid (FAFSA). You can apply online or submit your FAFSA form by mail or fax (1-800-433-3243). Once your application has been processed, you will receive an award letter from your school indicating how much you will receive in subsidized loans.

Once you have received your award letter, you can apply for subsidized student loans by logging into your account on the Department of Education website at https://www.studentloans.gov/myDirectLoan/index.action

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Direct Subsidized Loans and Direct Unsubsidized Loans are federal student loans offered by the U.S. Department of Education (ED) to help eligible students cover the cost of higher education at a four-year college or university, community college, or trade, career, or technical school. (You might see Direct Subsidized Loans and Direct Unsubsidized Loans referred to as Stafford Loans or Direct Stafford Loans, but these aren’t the official loan names.)

What’s the difference between Direct Subsidized Loans and Direct Unsubsidized Loans?

In short, Direct Subsidized Loans have slightly better terms to help out students with financial need.

Quick Overview of Direct Subsidized Loans

Who can get Direct Subsidized Loans?

Direct Subsidized Loans are available to undergraduate students with financial need.

How much can you borrow?

Your school determines the amount you can borrow, and the amount may not exceed your financial need.

Who will pay the interest?

The U.S. Department of Education pays the interest on a Direct Subsidized Loan

while you’re in school at least half-time,
for the first six months after you leave school (referred to as a grace period*), and
during a period of deferment (a postponement of loan payments).

Quick Overview of Direct Unsubsidized Loans

Who can get Direct Unsubsidized Loans?

Direct Unsubsidized Loans are available to undergraduate and graduate students; there is no requirement to demonstrate financial need.

How much can you borrow?

Your school determines the amount you can borrow based on your cost of attendance and other financial aid you receive.

Who will pay the interest?

You are responsible for paying the interest on a Direct Unsubsidized Loan during all periods.

what is an unsubsidized loan

An unsubsidized student loan is a type of loan that is not subsidized by the federal government. Interest begins accruing on the date of disbursement, and the accrued interest is capitalized and added to the loan balance until repayment begins. The borrower is responsible for paying all of the capitalized interest.

However, with a subsidized student loan, the government pays the interest while an eligible borrower is in school (at least half-time), during the 6-month grace period after graduation and during periods of deferment.

Since you will pay more in interest for an unsubsidized direct loan, you should borrow subsidized loans first. However, not all borrowers are eligible for subsidized loans, and the amount you can borrow is limited per academic year. Here are some things to consider before you take out an unsubsidized student loan.

Examples of Unsubsidized Student Loans
Unsubsidized loans include the unsubsidized Federal Stafford Loan, the Federal Grad PLUS Loan, the Federal Parent PLUS Loan, private parent loans and loans that consolidate and refinance these loans .

Private student loans and parent loans give borrowers more options than unsubsidized federal loans for making payments on the student loans during the in-school and grace periods. The most common of these are full deferment of principal and interest, interest-only payments and immediate repayment of principal and interest. Slightly more than a quarter of the private student loans offer fixed payments per loan per month, with $25 as the most common monthly payment amount.

Federal student loans provide for full deferment during the in-school and grace periods. Immediate repayment is an option on federal parent loans. There are no prepayment penalties on federal and private student loans, so nothing stops a borrower from making interest-only or fixed payments on unsubsidized loans that don’t offer these options.

About four-fifths of all student loans are unsubsidized.

Eligibility for Unsubsidized Student Loans
Eligibility for an unsubsidized student loan does not depend on financial need. More students will qualify for an unsubsidized student loan than for a subsidized student loan. Everybody, including wealthy students, may qualify for an unsubsidized student loan.

The borrower must be enrolled at least half-time as a regular student in a degree or certificate program at a college or university that is eligible for federal student aid. Some private student loans will lend to continuing education students who are enrolled less than half-time. For federal student loans and most private student loans, repayment begins six months after the borrower graduates or drops below half-time enrollment.

Eligible students must have a high school diploma, GED or the equivalent.

For federal student loans, the student must be a U.S. citizen or permanent resident. Some private student loans will lend to international students, if the borrower has a creditworthy cosigner who is a U.S. citizen or permanent resident.

The student must be in good academic standing with at least a 2.0 grade point average (GPA) on a 4.0 scale and making progress toward a degree that is consistent with graduating within 150% of the normal timeframe.

The borrower must not be in default on a previous student loan.

Most private student loans will require a credit check and a creditworthy cosigner.