What is a Subsidized Loan?

Subsidized Loans Save You Significant Money on Interest

Student loan paperwork
Jupiterimages/ GettyImages

After completing the October FAFSA students and parents eagerly await word of financial aid offers from prospective colleges. These awards can often mean the difference between having the ability to afford a preferred school and needing to attend a second choice. Although the final decision should never be based solely on money, it does play a crucial factor. One component which also needs to be taken into consideration is the amount of borrowing which is involved.

On the award notification you might see something like Direct Subsidized Loan, Direct Unsubsidized Loan, or PLUS Loan. These are different types of federal student loans. It is important that you understand the differences between them, as they can impact the amount of money you will have to repay down the road.

Subsidized and unsubsidized loans are federal student loans for eligible students which are designed to help cover the cost of higher education at a four-year college or university, community college, or trade, career, or technical school. In a direct subsidized loan, the federal government pays the interest while the student is in college or while the loan is in deferment. This type is very different than unsubsidized loans, where interest begins to accrue as soon as the loan is taken out. Although you may be able to defer paying this interest until after graduation, you are still responsible for paying off the entire amount of interest that builds up while you are in school.

How Long Do I Qualify For a Direct Subsidized Loan?

Direct Subsidized Loans are generally available to undergraduate students with greater financial need. Your school determines the amount you can borrow based on the information provided in your FAFSA. The amount available may not exceed your financial need.

If you are a first-time borrower on or after July 1, 2013, there is a limit on the maximum number of academic years that you can receive Direct Subsidized Loans. The general rule is that you can get subsidized loans for 150% of the established length of your current school program. This is called your “maximum eligibility period.”

For instance, if you were pursuing a bachelor's degree in a four-year program, but changed your major and needed more time before you could graduate, you can receive subsidized loans for only six years of schooling. If you go into a seventh year, you will not be eligible for further subsidized loans. After that point, the government will stop paying the interest on the loans while you are in school.

How Much Can I Borrow With a Subsidized Loan?

Your college will determine the types of loans you are eligible to receive during the school year. Your loan package is based on whether you are a dependent or independent student, what year you are in, and other financial aid received. The maximum available can change every year.

How Do I Get My Subsidized Loan?

Your university will send you information on how to accept the loan amount with your financial aid package. You will likely have to fill out a Master Promissory Note (MPN) that outlines the terms of the loan and repayment, and may need to undergo entrance counseling to ensure you understand your obligations when you take out the loan.

When the loan is ready for disbursement, the school will first take out necessary amounts for your tuition, fees and room and board. If there is money left over, it will be returned to you for your educational needs, such as buying books or other expenses.

What if I Don't Need the Amount I'm Offered?

If your loan amount is more than you need, you can cancel all or a portion of it by reaching out to your financial aid office. Be sure to review your promissory note, as there are often particular deadlines and forms you will need to sign to cancel any part of a loan.

Your loan payments will begin after graduation, or once you stop being a full-time student.

Borrow only what you need, and carefully plan ahead so your monthly payments are not more than your future income.