What is a Subsidized Student Loan?

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Mark Kantrowitz

By Mark Kantrowitz

January 22, 2020

Subsidized student loans are among the least expensive student loans. The federal government pays the interest on subsidized student loans during the in-school and grace periods, as well as during authorized deferments.

Borrowers are responsible for paying the interest on subsidized student loans after the loans enter repayment. Borrowers are also responsible for the interest that accrues during forbearances. The federal government pays the interest during deferments but not forbearances.

Examples of Subsidized Student Loans

Subsidized student loans include the subsidized Federal Stafford Loan, the Federal Perkins Loan and the portion of a federal consolidation loan that is attributable to a subsidized Federal Stafford Loan. Federal Perkins loans lose the subsidized interest benefit when consolidated.

The Federal Perkins Loan program ended on September 30, 2017.

The subsidized Federal Stafford Loan has been available only to undergraduate students since July 1, 2012. Graduate students are no longer able to borrow subsidized Federal Stafford Loans, but may borrow unsubsidized Federal Stafford Loans instead.

About one fifth of all student loans are subsidized.

Eligibility for Subsidized Student Loans

Eligibility for subsidized student loans is based on financial need. Recipients of a subsidized student loan must demonstrate financial need, which is the difference between the college’s cost of attendance and the student’s expected family contribution (EFC).

The amount of subsidized student loans a student can receive is capped at the student’s financial need and the loan limits, whichever is lower.

The loan limits for subsidized student loans are generally lower than the loan limits for unsubsidized student loans.

Borrowers of subsidized student loans must be enrolled on at least a half-time basis in a degree or certificate program at a college or university that is eligible for federal student aid.

Repayment begins at the end of the grace period after the student graduates or drops below half-time enrollment. The grace period is six months for subsidized Federal Stafford Loans and nine months for Federal Perkins Loans.

To be eligible for subsidized student loans, the student must also satisfy the general eligibility requirements for federal student aid, including:

  • The student must have a high school diploma, GED or the equivalent
  • The student must be a U.S. citizen or permanent resident
  • The student must maintain satisfactory academic progress (SAP), which requires at least a 2.0 GPA on a 4.0 scale and passing enough classes to be able to graduate within 150% of the normal time-frame for the student’s degree or certificate program
  • The student must not be in default on any previous federal student loan

How to Apply for a Subsidized Student Loan

To apply for the subsidized Federal Stafford Loan, the student must file the Free Application for Federal Student Aid (FAFSA).

The college financial aid office will send the student a financial aid award letter that will specify the amount of subsidized Federal Stafford Loan for which the student is eligible.

The student must then complete entrance counseling at studentaid.gov and sign a Master Promissory Note (MPN).

There may be a 30-day delay before the loan proceeds are disbursed, depending on the college, if the student is a first-time, first-year borrower.

The loan proceeds are credited to the student’s account at the college. The funds are applied first to tuition, required fees and, if the student is living in college owned or operated housing, to room and board. The funds in the student account may also be applied to other college charges, with the student’s permission. If there is a credit balance remaining, the college will refund it to the student within 14 days to pay for other college costs.

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