Paying for school can be tough. Especially with the huge costs of tuition, books and living expenses. This is why students usually opt for a student loan leading to about a collective $1.6 trillion in student debt.
However, not every loan is created equal. Federal student loans, which have US government backing, usually always come with favorable terms. More favorable than private loans that are backed by state agencies, financial institutions and other lenders.
Unlike private loans, federal loans do not require students to have a credit history or a co-signer. They also often have access to flexible repayment plans and loan forgiveness. Moreover, interest rates in a federal loan are usually fixed and are lower than the interest rates of a private loan.
However, one of the biggest advantages of a federal loan when compared to a private loan has to be how interest is accrued. If you want the best option to borrow money for college, a direct subsidized loan, also known as a federal subsidized Stafford loan is a good idea for you. However, this type of loan may not be available for everyone.
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What is a Federal Direct Subsidized Loan?
There are two varieties of federal student loans: subsidized and unsubsidized.
A direct subsidized loan, where “direct” means government-funded, is the most cost-effective way any undergraduate student looking to borrow money for college tuition and other school-related expenses can get a loan.
With a direct subsidized loan, you do not have to worry about interest accruing if you are enrolled at least part-time in an undergraduate degree program including the six months after graduation.
Your interest will begin accruing on the principal balance of the loan after the grace period of six months after you have graduated. At this point, the student will be required to begin making payments unless a deferment is received.
Direct subsidized loans are offered based on a student or their family’s financial need making it the most difficult type of loan to qualify for. In order to find out whether you are eligible for a direct subsidized loan or any other type of financial aid, you will be required to fill out the Free Application for Federal Student Aid (FAFSA). This will use your income and asset information in order to determine how much you and your family can contribute to college.
The interest rates for a subsidized and unsubsidized federal loan remain the same for the life of the loan. For undergraduate loans taken out between July 1, 2019 and June 30, 2020, the interest rate is calculated at 4.53% and for graduate loans, the interest rate is calculated to be at 6.08%.
The total lifetime maximum loan amount a dependent undergraduate student can take on with a federal loan is $31,000 where no more than $23,000 can be subsidized. Moreover, the maximum loan amount an independent undergraduate can take on is $57,500 including the same cap of $23,000 on subsidized loans.
How Much Can You Borrow?
It is your school that will determine the loan types and the loan you are eligible to receive each academic year. However, there are limits set that you may be eligible to receive each academic year on the amount of the loan in subsidized and unsubsidized loans known as annual loan limits. The aggregate loan limits are the total amounts that you can borrow for undergraduate and graduate study.
The actual loan amount that you would be eligible to receive every academic year may in reality be less than the annual loan limit. These limits depend on the following factors:
- What year of school you are in.
- Whether you are a dependent or independent student.
If you are a dependent student with parents that are not eligible for a Direct PLUS Loan, you may receive additional Direct Unsubsidized Loan Funds.
The aggregate limit for graduates will include all federal loans that are received for undergraduate study.
These aggregate loan limits will include any Subsidized Federal Stafford Loans or Unsubsidized Federal Stafford Loans that you might have previously received under the Federal Family Education Loan (FFEL) Program.
If the total amount you are receiving over the course of your education ends up reaching the aggregate loan limit, you will not be eligible to receive additional loans. However, if you repay some of these loans in order to bring your outstanding loan debt below the aggregate loan limit, you could then be allowed to borrow once more up to the amount of your remaining eligibility under the aggregate loan limit.
Graduate and professional students that have been enrolled in certain health profession programs can receive additional Direct Unsubsidized Loan amounts each academic year. For these students, there will also be a higher aggregate limit on Direct Unsubsidized Loans. If you are also enrolled in a health profession program, talk to your financial aid office at your school to get information about annual and aggregate limits.
What is the Difference Between Subsidized and Unsubsidized Student Loans?
In contract with a direct subsidized loan, a direct unsubsidized one accrues interest throughout the life of your loan and the borrower will be responsible for the repayment of the interest and principal. The interest adding hundreds or even thousands of dollars to the total repayment amount depends on how much you have borrowed.
To receive either type of loan, you are required to be enrolled at least part-time at a school that is a participant of the Direct Loan program. Generally, you would be required to have yourself enrolled in a program that leads to either a degree or a certificate awarded by your school. Direct Subsidized Loans are usually available to both undergraduates and graduate or professional degree students. You would not be required to show financial need in order to receive a Direct Subsidized Loan.
Is There a Time Limit?
If you are borrowing for the first time after July 1, 2013, you will have a limit on the maximum period of time, which is measured in academic years, in which you would be eligible to receive a Direct Subsidized Loan. This time limit will not apply to Direct Unsubsidized Loans or Direct PLUS Loans. If this limit applies to you, you may not be eligible to receive Direct Subsidized Loans for more than 150 percent of the published length of your program. This will be known as your “maximum eligibility period.”
This maximum eligibility period is typically based on the published length of any program of study present in your school’s catalog.
For example, if you have yourself enrolled in a four-year bachelor’s degree program, the maximum period for which you can receive Direct Subsidized Loans will be six years which is the 150 percent of 4 years. If you enroll yourself in a two-year associate degree program, the maximum period for which you will be able to receive a Direct Subsidized Loan will be three years which is the 150 percent of 2 years.
Since your maximum eligibility period is based on the length of your current program of study, it can also change if you change to a program that has a different length. Moreover, if you receive Direct Subsidized Loans for one program and then end up changing to another, the Direct Subsidized Loans you received for the previous program will also count for your new maximum eligibility period.
Certain types of enrollment can cause you to become responsible for the interest that will be accrued on your Direct Subsidized Loans which is when the U.S. Department of Education typically would have paid it.
There will be a loan fee on all Direct Subsidized Loans and Direct Unsubsidized Loans. This loan fee will be the percentage of the loan amount and will be proportionately deducted from each loan disbursement. This percentage will vary depending on when the loan is first disbursed.
Some additional steps you would have to take when receiving your loan will require you to get a financial aid package which will include all federal student loans and your school will guide you on how you should accept the loan. If you are receiving a Direct Loan for the first time, you will be required to:
- Complete entrance counseling which will ensure you understand your responsibility to repay the loan.
- Sign Master Promissory Note, a loan contract agreeing to the terms of the loan.
So, if you were also left wondering, “what is a Federal Direct Subsidized Loan?”, you have your answer. Subsidized loans are for undergraduate students who are in financial need. If you think that is you, the process to apply for a Federal Direct Subsidized is fairly simple. It is also a better choice than unsubsidized loans as there would be no interest accrued while you are still in school at least part-time.