In looking over the financial aid packages that colleges provide, you might see some terms that are unfamiliar. You have a general idea of what a loan is—you borrow money now, and pay it back later (plus some extra)—but what's a Direct Subsidized Loan? As it turns out, subsidized student loans are pretty unique (in a good way).
So what is a subsidized loan? How do you define subsidized and compare it to unsubsidized loans?
A Direct Subsidized student loan is one type of financial aid provided by the US federal government, or more specifically, the US Department of Education. You can also get Direct Unsubsidized student loans as part of your federal financial aid package. Before we get into the specifics of subsidized loans, I'll talk a little bit about why these loans exist, and how loans usually work.
A Brief History of Federal Student Loans
You can thank Russia and the Cold War for the first government-backed student loan programs. The federal government first started offering loans to students in the 1950s under the National Defense Education Act, or NDEA. After Russia launched Sputnik, the US scrambled to boost education in the sciences—hence, a financial program that encouraged students to pursue higher education.
Federal student loan programs have since been expanded to assist students to fund their education in a wide variety of disciplines, regardless of whether they plan on defeating Soviet Russia in an arms race.
OK, So How Do Loans Work?
The way that loans work is pretty standard, no matter where you're getting the loan from. You borrow a sum of money, or principal, from some lender—usually a bank. You also agree to particular loan terms, including interest rates and length of repayment.
When you make loan payments, which usually happens on a monthly basis, you pay back a portion of the principal plus extra money: the interest, or a percentage of the principal that's accrued (accumulated). The longer you take to pay back the loan, the more interest accrues. The bigger your principal, the more interest accrues.
You can think about interest as a charge or a fee that you pay to your lender. Interest is how lenders make money on loans. It usually starts accruing as soon as the loan is disbursed (when the money is given out, or provided to you.
Sometimes, the interest that has accrued on your loan is added to your principle. When new interest accrues, it will be on this new, larger principle. This is called capitalization—when this happens, you start paying interest on more than your original loan amount, which means more interest.
Loans can be really helpful when it comes to paying for school, but as you may have guessed, people generally don't love being in student debt. The less money you owe after you graduate, the better, right?
What Makes Direct Subsidized Loans Unique?
You're might already be thinking about how to decrease your loan payments in the long run. Subsidized loans can help you do that.
Direct Subsidized loans are special because, during certain periods of time, the federal government pays your interest for you. In the long run, this can save you a lot of money.
As I previously mentioned, interest on "normal" loans starts accruing as soon as the money is disbursed. When you have a subsidized loan, however, interest does not accrue during the following periods:
- When you're in school at least 1/2 time
- For the first 6 months after you leave school (this is called a grace period)
- During a postponement of loan payments (this is called a deferment period)
It's almost like your loan is frozen while you're still in school, and for 6 months after you leave. You're not adding any extra money to the amount you owe because interest isn't accruing; you also don't have to make any payments. This is useful if you need some time to find a job in order to be able to afford payments.
Ultimately, you're not being "charged" to borrow money—you're not building up any interest on your loan—when you're not in a position to be able to pay it back.
Subsidized loans: a little bit friendlier than your average student loan
Subsidized vs. Unsubsidized: How Much of a Difference Could It Make?
I'll use an example here to demonstrate long-term financial outcomes of a subsidized vs. an unsubsidized loan.
Say I take out a $3,500 loan to pay for school my freshman year, at an interest rate of 4.29%. The chart below outlines different outcomes based on loan type if I don't make any payments while still in school.
|
UNSUBSIDIZED |
SUBSIDIZED |
|
|
Amount Borrowed |
$3,500 |
$3,500 |
|
Interest Rate |
4.29% |
4.29% |
|
Interest Accrued During School (4 years) |
$640 |
$0 |
|
Balance Owed at Graduation |
$4,140 |
$3,500 |
|
Time to Payoff at $50/month (Interest accrues for both subsidized and unsubsidized loans during this period) |
99 months |
81 months |
|
Total Amount Paid |
$4,950 |
$4,050 |
Standard repayment plans for federal student loans set a timeline of 120 months until payoff, but the minimum monthly payments are $50. In this example, it would take me much less time (and much less money) to pay back a subsidized loan vs. an unsubsidized loan.
Direct Subsidized Loan Details
There are some standardized limits, restrictions, and repayment terms for all students who take out Direct Subsidized loans. They're not quite as flexible as Direct Unsubsidized loans, but that's a small price to pay when you consider how much money they save you in the long run.
First, there are limits to how much money you can take out in subsidized loans. These annual maximums depend on your year in school:
|
Year |
Subsidized Loan Limit |
|
1st Year Undergrad Annual Limit |
$3,500 |
|
2nd Year Undergrad Annual Limit |
$4,500 |
|
3rd Year Undergrad & Beyond Annual Limit |
$5,500 |
|
Subsidized Total Loan Lifetime Max |
$23,000 |
There are also limits to eligibility windows for Direct Subsidized loans, unlike for Direct Unsubsidized loans. You can only receive subsidized loans for 150% of your program length; for example, if you're enrolled in a 4-year college, you can receive subsidized loans for a maximum of 6 years (4*150% = 6).
Interest rates are standardized and are the same as for unsubsidized loans. Federal student loan interest rates are generally pretty competitive and are the same for all students regardless of credit history. For 2015-2016, the interest rate is 4.29%.
Finally, repayment plans (including details about the amount you owe every month, and the amount of time you have to pay back your loans) can be customized, and will depend on variables such as your principle balance and your income. Standard repayment plans set up monthly payments so that you pay off your principle + interest in 120 months, or 10 years.
Who's Eligible for Direct Subsidized Loans?
If you're looking for aid to bridge the gap between what you have and what you need to pay for college, subsidized loans are smart options if you meet all the eligibility requirements.
Direct Subsidized loans are only available to undergraduate students who demonstrate financial need. Because these loans are a form of federal aid, you must also meet basic federal requirements in order to be eligible. The following charts list these requirements.
|
You must do all of the following: |
|
Have a high school diploma, GED, or approved homeschool education |
|
Be enrolled or accepted to enroll in an eligible degree/certificate program
|
|
Be registered with Selective Service, if you are male and between 18-25 years old
|
|
Have a valid Social Security Number (unless you're from the Marshall Islands, Federal States of Micronesia, or the Republic of Palau) |
|
Sign statements on the FAFSA stating that (1) you're not in default, and do not owe refund money, on a federal student loan, and (2) you'll only use federal aid money to help pay for your education
|
|
Maintain "satisfactory" progress in school
|
In addition to the requirements listed in the chart above, you must be able to check one of the following options:
|
Be a US citizen or US national |
Have a green card |
Have an arrival-departure record |
Have battered immigrant status |
Have a T-Visa |
How Do You Apply for a Direct Subsidized Loan?
All things considered, eligibility requirements aren't too stringent for subsidized loans. The next step after meeting requirements would be to actually apply for this great financial aid resource.
You can apply for all types of federal financial aid, including Direct Subsidized loans, by submitting a Free Application for Federal Student Aid, or FAFSA. The federal submission deadline to receive aid for the 2015-2016 academic year is June 30, 2016. You can find detailed instructions on submitting a FAFSA here.
What's Next?
You can get an estimate of your federal aid eligibility, including the amount you could take out in Direct Subsidized loans, by following steps listed in our Pell Grant Calculator guide.
Want more information on federal aid that you don't have to pay back? Learn more about how to get a Pell Grant, and check out our guide on Pell eligibility requirements.
