By Ben LuthiWhat Is a Subsidized Student Loan?
Federal student loans come in two main types: subsidized and unsubsidized. A subsidized loan is a student loan for undergraduate students who demonstrate financial need.
Subsidized loans don't accrue interest the same way other loans do because the government temporarily covers interest costs. Here's what you need to know about how subsidized student loans work and how to get one.
What Is a Subsidized Loan?
A subsidized loan is a type of federal student loan available to undergraduate students who can prove financial need. The key feature of a subsidized loan is that the U.S. Department of Education pays the interest while you're enrolled at least half time, during your six-month grace period after leaving school and during any periods of deferment.
This means your loan balance won't grow during these times, making it more affordable in the long run compared to other types of loans.
Learn more: What Is Loan Deferment?
Subsidized vs. Unsubsidized Loans
Both subsidized and unsubsidized loans are federal student loans, but they differ in terms of borrower eligibility and how interest is handled. Subsidized loans offer more favorable terms, but they're only available to undergraduates who demonstrate financial need.
| Subsidized | Unsubsidized | |
|---|---|---|
| Financial need requirement? | Based on financial need | No financial need requirement |
| Who can borrow? | Undergraduate students | Undergraduate, graduate and professional students and parents |
| How much can you borrow? | Up to $5,500 annually; up to $23,000 in total | Up to $12,500 annually and $57,500 in total for undergraduates; up to $20,500 annually and $138,500 in total for graduate and professional students |
| How does interest work? | Fixed, accrues when you leave school | Fixed, accrues immediately |
Here are the primary differences between the two types of federal student loans:
- Eligibility: Subsidized loans are for undergraduates only; unsubsidized loans are open to undergraduates, graduate students and professional degree seekers. Additionally, subsidized loans require financial need, while unsubsidized loans do not.
- Interest accrual: The government pays interest on subsidized loans while you're in school at least half time, during the grace period and during deferment. With unsubsidized loans, interest begins accruing immediately, and unpaid interest may be capitalized, increasing your balance.
Pros and Cons of Subsidized Loans
Subsidized student loans can be a smart way to fund your education, especially if you qualify based on financial need. But like any financial product, they come with both advantages and limitations to consider.
Pros of Subsidized Loans
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Interest benefit: The federal government pays the interest while you're enrolled at least half time, during your six-month grace period and during deferment. This helps reduce the overall cost of your loan.
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Flexible repayment options: Subsidized loans qualify for federal repayment plans, including income-driven repayment and Public Service Loan Forgiveness. These programs can offer lower monthly payments and even loan forgiveness in some cases.
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Affordable interest rates: Federal student loan interest rates are typically lower than those offered by private lenders, particularly for undergraduate students. This makes subsidized loans one of the most affordable ways to borrow for college.
Cons of Subsidized Loans
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Low borrowing limits: There's a cap on how much you can borrow each year and in total. If your education costs more, you'll need to rely on unsubsidized or private loans to fill the gap.
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Limited student eligibility: Graduate and professional students aren't eligible for subsidized loans. If you're pursuing an advanced degree, you'll need to consider other loan options.
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Need-based: You must demonstrate financial need to qualify. If your income or your parents' income is too high, you may not be eligible.
How Much Can I Borrow With a Subsidized Loan?
The amount you can borrow with a subsidized student loan is determined by your school, and the amount can't exceed your financial need. The amount you can borrow each year also depends on your year in school and your dependency status.
Here's a look at the annual and aggregate limits for subsidized loans for both dependent and independent students:
| Year | Limit |
|---|---|
| First-year undergraduate | $3,500 |
| Second-year undergraduate | $4,500 |
| Third-year undergraduate and beyond | $5,500 |
| Aggregate loan limit | $23,000 |
Source: U.S. Department of Education
How to Get a Subsidized Loan
If you're an undergraduate student with financial need, subsidized loans can be a great way to help pay for school. Here's how to apply and what steps to follow:
- Make sure you meet the basic requirements. To be eligible for federal student loans, you need to meet the following criteria:
- Be a U.S. citizen, national or permanent resident
- Be enrolled at least half time in an eligible program
- Be in good academic standing
- Have no defaults or unresolved refunds on previous federal aid
- Demonstrate financial need
- Complete the Free Application for Federal Student Aid (FAFSA). Fill out the FAFSA as early as possible each year. This is how the government and your school determine your financial need and eligibility for federal student aid, including subsidized loans.
- Review your financial aid offer. After your FAFSA is processed, your school will send you a financial aid award letter. This letter outlines the types and amounts of aid you qualify for, including whether you're eligible for a subsidized loan.
- Accept the subsidized student loan. Log in to your school's financial aid portal and accept the subsidized loan amount you wish to borrow. You don't have to accept the full amount, though. Only borrow what you need to avoid unnecessarily high student loan payments.
- Sign the Master Promissory Note (MPN). To officially receive the loan, you'll sign an MPN, which is a legal agreement to repay the loan under the stated terms. You'll typically only need to do this once for federal loans at a given school, but some may require you to sign it more than once.
If this is your first time taking out federal student loans, you'll also need to complete online entrance counseling. This short tutorial explains your rights, responsibilities and repayment obligations.
Your school will apply your loan funds directly to your account to cover tuition, fees and other education-related costs. If there's money left over, it will be refunded to you.
Learn more: How to Pay for College When Financial Aid Isn't Enough
Frequently Asked Questions
The Bottom Line
Subsidized student loans can be a smart, low-cost way to borrow for college if you qualify based on financial need. With interest covered during key periods and access to flexible repayment options, they offer meaningful financial relief for undergraduates.
But because borrowing limits are lower and eligibility is more limited, it's important to understand how these loans fit into your broader college financing plan.
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About the author
Ben Luthi
Ben Luthi has worked in financial planning, banking and auto finance, and writes about all aspects of money. His work has appeared in Time, Success, USA Today, Credit Karma, NerdWallet, Wirecutter and more.
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