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After you fill the Free Application for Federal Student Aid (FAFSA) and then proceed with a college application, you will get financial aid award letters from your prospective college that explain the financial aid you are eligible to receive. One of the financial aid offers includes a subsidized student loan. These government loans are helpful in the right circumstances. So what is a subsidized loan? This article highlights what is a subsidized loan, how it works, benefits, and how to apply.

What Is a Subsidized Loan?

Many students can apply for a subsidized student loan. Before applying, you need to know what is a subsidized loan. A subsidized loan is also referred to as a direct subsidized loan. It is a federal loan for undergraduate college students who are still pursuing their courses and need help to pay for their tuition fees and related expenses. The loan is determined by the cost of the attendance minus the expected family contribution and other forms of financial aid the student is expected to receive, for example, scholarships and grants.

You must also differentiate a subsidized loan from other types of loans. Subsidized loans differ from unsubsidized loans in that the Department of Education pays for the interest while the student is in school, provided that the student attends school at least half-time, and for the first six months after graduation, which is referred to as the grace period, and during deferment periods.

Therefore, if you take an unsubsidized loan, which is also referred to as a private student loan, you pay all interest accrued in the entire schooling period. It has no grace period and interest will accrue regardless of deferment periods. Therefore, this is why subsidized loans are superior.

To qualify for a subsidized loan, you must first visit and complete the Free Application for Federal Student Aid (FAFSA). It is free to apply for FAFSA. Once you qualify for the subsidized loan, your school notifies you. According to the Department of Education, over 20 million FAFSA applications are submitted annually, which leads to over $120 billion in federal loans, grants, and work-study funds intended for students to pay their school fees.


Now that you know what is a subsidized loan, check whether you are eligible. One downside of subsided student loans is that not everyone will qualify. There are set criteria you should meet for you to be granted a subsidized loan. First, you must have enrolled at least half-time in an undergraduate program and participate in the Direct Loan Program that results in a certificate or degree.

This means that graduate students are not eligible for subsidized loans. Second, the applicants must show that they need financial aid in paying for the school fees. 

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This is done by completing FAFSA and comparing your expected contributions to the total cost of attending school.

Therefore, note that only undergraduates who have shown that they need financial help are eligible for the Direct Subsidized Loans. Professional and graduate school students are not eligible for subsidized loans. You need to meet the following requirement for you to be awarded the subsidized loans:

  • Undergraduate student
  • U.S. citizen, national, or eligible non-citizen
  • Have verified financial need as determined by the FAFSA
  • Enrolled at least half-time in an eligible program (degree or certificate program)
  • Have received a high school diploma or the equivalent (for example, GED)
  • Meet general eligibility requirements for federal student aid
  • Not in default on any existing federal student loans

You are not required to meet the following criteria for you to be eligible for the subsidized student loan:

  • Cosigner
  • Credit check
  • Separate loan application

Loans are credited to your account in this order:

  • Tuition and fees
  • Room and board (if you are living in college-owned student housing)
  • Other school charges (with your permission)

When Is It Most Useful?

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Now that you are acquainted with what is a subsidized loan, you need to know when to use it because of its benefits. The big benefit of subsidized student loans is that you do not have to pay for the accrued interest rate since the government pays. This is only applicable when you are in school, regardless of whether or not you deferred and in the first six months upon completion of the program.

With the other student loans, such as the unsubsidized student loans, the interest accumulates even when in school. This is assuming that you are not making any payments. This increases your loan balance significantly that you eventually should pay back. The following are the summarized benefits of subsidized student loans and why you would use it:

You Do Not Need a Cosigner

In most of the federal student loans, except for Direct PLUS Loans, your credit is not considered. This means that you need not apply for a cosigner.

There Is No Need of a Strong Credit History to Be Eligible for Federal Student Loans

Unlike private student loans, the federal student loans do not require borrowers or have a strong credit history. This is helpful for recent high school graduates planning to attend college bit have insufficient tom to build up their credit scores of their own.

You Make Payments Based On What You Earn

Once you take a subsidized student loan, you can repay it based on income-driven or income-based repayment plans. Therefore, you can pay the loan based on your income and family size, implying that paying the loan will not be a burden for you or your family.

Subsidized Student Loans Affords the Borrower Flexibility

Been through the student loan, whether private or federal, is a legal agreement that must be paid back with interest, the federal student loans allow for more flexibility than the private student loans. For instance, with federal student loans, the borrower can change the repayment option even after the disbursement of the loan.

How to Apply?

Since you have information on what is a subsidized loan, you need to know how to apply. You need to file the FAFSA before you are awarded the federally subsidized student loan from the Directs Loan program.

The following are the steps you need to follow:

  1. 1
    Complete the Free Application of Federal Student Aid (FAFSA) or Renewal FAFSA at You should note that Renewal FAFSA is only meant for returning students. The fastest and easiest way of filing FAFSA is online. However, you can still fill out the main paper application, but the processing is about 7-10 days. The online application process typically takes 3-5 days to process.
  2. 2
    Upon application, you should receive a financial aid letter by email or mail from your school’s financial aid office. This latter summarizes your available financial aids options, including the Direct Subsidized Loans if you are eligible.
  3. 3
    You should then contact your school’s financial aid office, so it accepts the financial aid and includes student loans.
  4. 4
    You should then sign any associated paperwork to facilitate the loan disbursement, such as the Master Promissory Note (MPN).

What Happens After Submitting FAFSA

After you submit FAFSA, the government sends you a Student Aid Report (SAR), which provides you with basic information pertaining to your eligibility for the federally subsidized student loan or aid. The college you included in your FAFSA will have access to this information, and it will use it in determining the amount of federal grants, work-study, and loans you are eligible for.

The college sends you a financial aid award letter that details the financial aid you are qualified to receive, including the grants, student loans, and work-study. The amount varies based on the school you enrolled with, just as the total cost of attending the program.

Loan Limits

Knowing loan limits will provide more understanding of what is a subsidized loan. If you are in the first year, you are eligible for $5,500 but only $3,500 can be subsidized. Not more than $4,500 is subsidized in your second year out of $6,500 you are eligible for. In the third year, you are eligible for $5,500 out of $7,500 of the subsidized loan.

Interest Rates and Loan Fees

The current fee on Direct Subsidized Loans is 1.062% for loans borrowed through September 30, 2018. The fees are deducted from each disbursement. You should ask from your college‘s financial aid office to increase the loan amount to cover the fees, up to the yearly loan limit.


You need to know what is a subsidized loan before applying with FAFSA. The subsidized loan is a good way of getting a loan to pay for our school fees since it does not accrue interest while you are in school, including mid-term and deferment periods. However, there are set limits, which you should check when applying. You might qualify for subsidized student loans at one school and not in another if the cost of schooling is different. If you are eligible for the loan, the school determines which amount you qualify for and lets you know how much you are eligible to borrow as part of the overall financial package.

We recommend applying online as it is faster than when you apply through the mail. The benefit of subsidized loans is that they are less expensive and are easier to pay back compared to any other type of student loans. Besides, you do not need a cosigner, there is no need of a strong credit history to be eligible, you make repayments based on what you earn, and subsidized student loans affords the borrower a great deal of flexibility. We hope that this article has adequately highlighted what is a subsidized loan, its benefits, and a guide on how to apply.

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