What Is a Subsidized Loan?

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ByChristopher Boston
Edited byRae Osborn
ByChristopher Boston
Edited byRae Osborn

Updated: January 11, 2024

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Planning and paying for college is a significant step that requires careful financial consideration. As students and families explore their options, federal student aid offers a variety of resources to ease the burden of educational expenses. Among these, subsidized loans are a beneficial choice for those who qualify.

Subsidized loans help students with demonstrated financial need by not accruing interest while they are in school. However, it's important to fully understand how subsidized loans work to determine if they align with your financial circumstances. Making the right choice will help you manage your educational expenses more effectively, leading to a more secure financial future post-graduation.

What Is a Subsidized Loan?

A subsidized loan is a form of federal student aid designed for undergraduate students demonstrating financial need. These loans offer the strategic benefit of not accruing interest while the student is enrolled at least half-time, during grace periods and deferment periods. This special feature is intended to ease the financial burden on students by keeping the loan amount from increasing while they focus on their education.

To access this loan, students must complete and submit the Free Application for Federal Student Aid (FAFSA), which determines eligibility based on financial need. Once qualified, the school sets the loan amount based on the cost of attendance and other financial aid received. The U.S. Department of Education pays the interest during specified periods, allowing students to graduate with less debt.

Subsidized Loans vs. Unsubsidized Loans

Both subsidized and unsubsidized loans are forms of financial aid provided by the federal government, aimed at helping students cover the costs of higher education. While they share this common purpose, there are key differences between them that are crucial for borrowers to understand.

Subsidized loans are available to undergraduate students with demonstrated financial need. The most notable benefit is that the U.S. Department of Education pays the interest on these loans while the student is in an in-school, grace or deferment period. This can significantly reduce the amount that students owe after they graduate.

On the other hand, unsubsidized loans are available to both undergraduate and graduate students, regardless of financial need. With unsubsidized loans, interest accrues from the time the loan is disbursed, increasing the total amount that will need to be repaid.

Subsidized Loans
Unsubsidized Loans


Undergraduate students with demonstrated financial need.

All students (undergraduate, graduate, and professional)

Interest Payment

Paid by the government while the student is in school and during grace and deferment periods

Accrues from the time of disbursement and is the student's responsibility

Financial Need Requirement



Loan Limits

Generally lower than unsubsidized loans and vary based on year in school and dependency status

Higher limits compared to subsidized loans, also varies based on level of study and dependency status

Understanding these distinctions helps students and families make more informed decisions about borrowing for education, ensuring they choose the option that best suits their financial situation and long-term goals.

Pros and Cons of Subsidized Loans

Before embarking on the application process for a subsidized loan, weighing its pros and cons is crucial. Understanding both sides ensures that students make informed decisions that align with their financial realities and long-term educational goals. Doing so can also prevent unexpected challenges and financial strain in the future.

Advantages of Subsidized Loans

  • Government Pays Interest: The U.S. Department of Education covers the interest on subsidized loans while the student is enrolled at least half-time, during grace periods and during deferment. This significantly reduces the total amount the student will owe after graduation. As such, students can focus on their studies without the added stress of accruing interest.

  • Various Repayment Plans: Subsidized loans offer several repayment options, catering to different financial situations post-graduation. These include the Standard Repayment Plan, which has fixed payments over 10 years; the Graduated Repayment Plan, with payments that start lower and gradually increase; and the Income-Driven Repayment Plans, which calculate monthly payments based on income and family size.

  • Need-Based to Aid Undergraduates: Subsidized loans are specifically for undergraduate students who demonstrate financial need. This ensures that financial assistance is targeted to those who might not otherwise afford college. It makes higher education more accessible and helps level the playing field.

  • Lower Overall Borrowing Cost: With the government covering the interest for significant periods, the overall borrowing cost is lower than unsubsidized loans. This can mean thousands of dollars saved over the life of the loan. Lower debt upon graduation can lead to greater financial freedom and opportunities.

  • Encourages Educational Pursuit: By making college more affordable, subsidized loans encourage students from all backgrounds to pursue higher education. This opens doors to better career opportunities and personal growth.

Disadvantages of Subsidized Loans

  • Limited Eligibility: Subsidized loans are only available to undergraduate students with demonstrated financial need. This excludes graduate and professional students and those undergraduates who don't meet the specific financial criteria. As a result, many students may not qualify for this type of aid.

  • Borrowing Caps: The amount you can borrow with subsidized loans is relatively low and capped by academic year and total education level. This means the loans might only cover some educational costs, requiring students to seek additional funding sources. Students may take on more debt through other loans to cover the gap.

  • Potential for Over-Borrowing: While loans can be helpful, the availability of subsidized loans might encourage some students to borrow more than they need. This can lead to a higher debt burden post-graduation despite the interest benefits. Students must borrow only what they need and understand the long-term implications.

  • Repayment Still Required: Despite the interest benefits, borrowers must eventually repay the principal amount of subsidized loans. Repayment begins after the grace period post-graduation, adding financial responsibility to the individual's budget. This can be a challenge, especially for those entering low-paying fields.

How Much Can You Borrow With a Subsidized Loan?

The amount you can borrow with a subsidized loan each year depends on several factors, including your year in school, dependency status, your school's cost of attendance and your particular financial need. These variables combine to determine the maximum amount you're eligible to receive, which may vary per student and institution.

Additionally, there's a lifetime borrowing cap of $23,000, which means this is the maximum amount you can borrow in subsidized loans throughout your undergraduate education.

Here are the annual borrowing limits for subsidized loans:

First-Year Undergraduate

Up to $3,500. For first-year students, this is the maximum amount they can borrow in subsidized loans, which might be less based on financial need and cost of attendance.

Second-Year Undergraduate

Up to $4,500. As students progress in their academic careers, the borrowing limit increases slightly to accommodate growing educational expenses.

Third-Year Undergraduate

Up to $5,500. In the third year and beyond, the annual limit increases again, offering more support as students near the completion of their undergraduate degrees.

Requirements for a Subsidized Loan

Eligibility requirements for subsidized loans are in place to ensure that this financial aid is allocated to undergraduate students who most need the assistance. Understanding these criteria is crucial for applicants, as it helps them determine their eligibility before investing time and effort into the application process. Knowing the requirements also helps students plan their finances and explore other funding options if they don't qualify for subsidized loans.

To qualify for a subsidized loan, a student must:

  • Be a U.S. citizen, national or permanent resident.
  • Be enrolled in school at least half time.
  • Complete the FAFSA.
  • Never have defaulted or owe a refund to any previous student loan or aid.
  • Stay in good academic standing.
  • Demonstrate financial need.
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Financial need for subsidized loans is calculated by subtracting the Student Aid Index (SAI) and any other financial assistance you receive from the cost of attendance (COA) at each school.

  • COA: This is the total amount it will cost to go to school, including tuition and fees, room and board, and allowances for books, supplies, transportation and personal expenses.

  • SAI: The SAI, which replaces the Expected Family Contribution (EFC), is an eligibility index derived from your FAFSA, determining how much student aid you will receive.

When you subtract the SAI and any additional financial aid (like scholarships or grants) from the COA, the remaining amount is your financial need. This figure determines your eligibility for need-based aid, such as subsidized loans, with a lower SAI indicating higher financial need.

How to Get a Subsidized Loan

Knowing the steps to secure a subsidized loan is crucial for navigating the often complex landscape of financial aid. This knowledge equips students and their families with the necessary tools to approach the borrowing process confidently and efficiently, maximizing their chances of receiving aid.

Complete the FAFSA

The FAFSA is the single most important form for accessing federal financial aid, including subsidized loans. It requires detailed financial information from the student and their family to determine eligibility. Ensure accuracy and completeness to avoid delays or errors in your aid determination. Submit the FAFSA by the deadline, as some aid is awarded on a first-come, first-served basis.

Review Your FAFSA Submission Summary

After submitting the FAFSA, you'll receive a summary of your submission, which provides an overview of the information you've provided. It's crucial to review this summary carefully to ensure all the data is accurate and complete, as any errors can affect the calculation of your SAI, an eligibility index for federal student aid. If you spot any inaccuracies or have experienced a change in financial circumstances, it's important to update your FAFSA promptly to reflect the most accurate financial picture.

Await and Review Aid Offers from Schools

Schools you've applied to and listed on the FAFSA will send you financial aid offers. These offers will detail how much aid you're eligible for, including subsidized loans. Compare the offers to understand how much of your need is covered by subsidized loans versus other types of aid. Remember, accepting a subsidized loan means committing to repayment after graduation.

Accept the Loan and Complete Counseling

If you accept a subsidized loan, you'll need to formally accept it through your school's financial aid office. First-time borrowers must also complete entrance counseling, a helpful tool that explains your obligations and provides valuable information about managing your loans. This step ensures you understand the terms and responsibilities associated with borrowing.

Sign the Master Promissory Note (MPN)

The MPN is a legal document indicating you promise to repay loan along with any accrued interest and fees. It outlines the terms and conditions of your loan. Signing the MPN is a serious commitment, so read it carefully before you agree to the terms. This is the final step in securing your subsidized loan.

Frequently Asked Questions About Subsidized Loans

Navigating the landscape of subsidized loans can be complex and often leads to numerous questions. MoneyGeek answered some frequently asked questions to provide essential insights and help clarify common concerns, making the borrowing process less daunting.

When do I have to start repaying my subsidized loan?
Can I defer payments on my subsidized loan?
What happens if I can't repay my subsidized loan?
Can subsidized loans be forgiven?
How does a subsidized loan affect my credit score?

About Christopher Boston

Christopher Boston headshot

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.

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