The Subsidized Loan: Is It the Better Student Loan?

Many details of the Subsidized Loan (also known as the Direct Subsidized Loan and Subsidized Stafford Loans)for college students gets lumped into its twin also known as the Unsubsidized Loan. Yes there are many similarities but also some differences. Now I apologize ahead of time as much of the information below is going to be similar to my last post. However, I wanted to separate these two out as I think it will be easier to digest and understand.  

What are Subsidized Loans?

A Direct Subsidized Loan are federal loans that are borrowed by undergraduate students that display financial need. The U.S. Department of Education will pay for the interest on the Directed Subsidized Loan while in school at least half-time (how nice of them right?). They also will pay the interest for the first six months after you leave school and during periods of deferment.

*To note that the loan (Unsubsidized included) is sometimes referred to as a Stafford Loan as it was named after the U.S. Senator Robert T. Stafford for his work in high education.

Is the Subsidized Loan Better?

Is the Subsidized Loan better? Well, first hear the fact that the U.S. Department of Education pays for the interest one would think yes. In my humble opinion I can’t say if it’s better than its twin (Unsubsidized). I am one of these people that feels they are both needed eventually to pay for a student’s degree program.

Differences between Subsidized and Unsubsidized

The chart below (used in the previous post) shows the main differences between the Subsidized and Unsubsidized student loan.

Pros and Cons of the Subsidized Loan

So how can there be cons with the Subsidized Loan? Well although it has a “one up” on its twin, we should still be reviewing the pros and cons of it.


  • U.S. government will pay for the interest if enrolled in at least half-time (6 or more credits)
  • Interest will also be paid during deferment
  • Six-month grace period after graduation


  • Graduate students don’t qualify for this
  • Students who can’t demonstrate financial need  (which happens if the parents earn too much) cannot qualify
  • Limits. So if a Dependent student can receive $31,000 from both unsubsidized and subsidized loans, it’s capped at $23,000 for the subsidized loans.

Subsidized Loan Eligibility

To receive either one of the loans, you must adhere to the following:

  • Be enrolled at least half-time at a participating school (at least 6 credits)
  • Must be enrolled in a program that leads to a degree or certificate
  • Show financial need

Can Eligibility be Lost?

A student can only receive subsidized loans for 150 percent of the length of the program. This length is set by the school. So if your school says that your bachelor’s degree program lasts for four years, you’ll only be able to get subsidized for six years. Anything taken out after that will then be Unsubsidized. If a new bachelor’s program is then started then you can take out subsidized loans again.

Application Process for Subsidized Student Loan

To apply for the Unsubsidized (or subsidized) loan, you must complete our good friend known as the Free Application for Federal Student Aid (FAFSA) form.  The completion of the FAFSA will determine you need and eligibility for the loan. Once you complete the FAFSA form then your school can break down your semesters for you.

Importance of your Financial Advisor

I wanted to briefly stress the importance of the college financial advisor during the process of applying for the subsidized loan and seeing what you will be receiving.

When I would conduct the financial aid sessions with potential students we would go over the loan options. I would get to the part of the subsidized and unsubsidized loans and after hearing the difference, more often than the not the students would say “oh I just want the one where the interest is paid.” That may very well work for a little bit but the loan still has to be repaid and at some point you may need the Unsubsidized Loan.

How much can you borrow?

Like with any loan, it’s super important to know what you can borrow. The amount you can receive is going to be based on if the FAFSA determines if you are a dependent student or an independent student. And depending on how you are coined, then there are limits to each of those.

Dependent Students and Independent Students

Dependent Students – are defined as undergraduate student sunder the age of 24 as of December 31st of the award year. (Unless you are married, have dependents (kids), are an orphan, or are a veteran or active military member.

Independent Students – are those students over the age of 24.

So what does this mean for the amount of money you can borrow? The chat below highlights all the amounts each is able to obtain based on their year (first, second, and third and beyond).

Amounts you can borrow

The chart below displays how much you can borrow based on the year you are in.

Can you borrow more Subsidized Loans?

Subsidized loans have annual aggregate limits and these are unable to be increased. Nevertheless, if a student receives less than the maximum Subsidized Loan award for your level and the financial situation has changed significantly since the completion of the FAFSA then should speak to your schools financial advisor to see if the award can be increased.

Subsidized Aggregate Loan Limits

A little bit different here as opposed to the Unsubsidized Loans. The Direct Subsidized Loans are the same for both dependent and independent students.

Dependent Undergraduate Students

  • Year 1 – $3,500
  • Year 2 – $4,500
  • Year 3 – $5,500

Independent Undergraduate Students

  • Year 1 – $3,500
  • Year 2 – $4,500
  • Year 3 – $5,500

Interest Rates for Direct Subsidized Loans

Interest rates for the Subsidized Loan are fixed. They will not change at all during the time that you have the loan. Currently the fees on Subsidized Loans is at 1.062% for the loans borrowed though September 30th, 2018.

Government pays the Interest?

So remember, the government pays the interest on the Subsidized Loans. You again will just need to be enrolled in at least half-time status (6 or more credits) in a semester. It’s important to know the credits of the classes you are going to be taking. I’ve seen situations where the students want to space out their classes in a term (due to a personal situation) and the two classes that they need to complete their program totals 5 credits. Uh oh… then what? Well this is where being financially responsibility comes into play. If proactive, then you would be able to predict this occurrence and therefore be prepared for it.

Loan Repayment

A student will need to pay back the loans that have borrowed after:

  • Graduation
  • Leave school
  • Drop below half-time status (less than 6 credits)

There is a six-month grace period before you are required to start making payments. During that time period, the loan serviced will contact you and provide options that are available with notification of first payment date (which are normally monthly).

Repayment Options

Commonly, you will have 10-25 years to repay your loan. The way to find out the options is to contact your loan servicer. Your loans servicer is assigned to you by the U.S. Department of Education. Much like a mortgage on a house, the servicer can change at any time.

If you want to get a look at what your loan repayment plan may look like, you can check out a Repayment Estimator here. Repayment Estimator.

Loan servicers typically offer the following types of repayment plans:

  • Standard repayment plan
  • Graduated repayment plan
  • Extended repayment plan
  • Pay as your earn
  • Income-based repayment
  • Income-contingent
  • Income-sensitive

All these plans will be discussed in more detail in future posts

Final Thoughts

The Direct Subsidized Loans are the better deal but there is some context to this. Between the financial need that needs to be met and the limits you have, it may not (and in most cases) be enough. The cost of your program and financial aid package will be crucial. As much as I would like to say that you can get through by just borrowing the subsidized loans, I just do not feel that it’s realistic today.

More often than not it will be need to be a combination of the two types of loans. This is where strategy comes into play where by being proactive and being able to forecast the financial shortcomings for your terms, it will allow you to get control of the situation. Control is the key to the situation, if you need to borrow, that is fine however know the details and gain control.

Tuition Drop Podcast

You can check out our episode of the Tuition Drop Podcast on Subsidized Loans below.

Tuition Drop Podcast – Subsidized Loans
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