Student signing a student loan agreement

How Do I Qualify for a Subsidized Federal Student Loan?

A subsidized student loan is a direct loan from the Department of Education for undergraduate study in which the government pays some of the interest payments. Subsidized loans are available to undergraduate students who demonstrate financial need; it is available only at colleges that participate in the program. The purpose of the program is to reduce the costs of loans for students with demonstrated financial needs.

A means test determines eligibility for the program, for students must demonstrate that the loan funds are necessary and that payment of interest would impose a hardship. To qualify for a direct subsidized student loan, a student must be in an undergraduate program, which leads to a two or four-year degree, and demonstrate the need for the financial assistance. Need is essentially that, without the assistance, the student would be unable to attend a two or four-year college. Students who do not demonstrate need can obtain unsubsidized student loans.

The program limits subsidized loans to the amount of need as determined by the institution the student attends. It is a costs-based determination based upon school fees, tuition, room, and board and expected expenses. Student loans represent borrowed funds, and students must repay the loans with interest. To assist students with demonstrated need, the Department subsidizes loans by paying the interest on the loans during the student’s college tenure, grace periods, and any periods of deferment. A grace period is the first six months after a student graduates or leaves school; a deferment is any period in which the lender suspends payments, and during which interest does not accrue.

The application process begins with the standard application, the Free Application for Federal Student Aid or FAFSA. The institution, which the student attends, must then determine the amount of aid and need-based aid. Subsidized loans enable students with financial needs to attend college and finance their educations. The limits for subsidized loans are $3,500 for the first year, $4,500 for the second, and $5,500 per year for the last two years. The overall limit for undergraduate subsidized loans is $23,000. There is a one-time charge for a subsidized loan of 1%, which the lender adds to the principal due.

The United States Department of Education offers unsubsidized direct student loans to undergraduate and graduate school students. This important source of funds makes education possible for millions of Americans who could not afford to pay the costs of attending college out of pocket and family resources. In 2013, the average annual costs of college in the United States were approximately $21,000.

The benefits of higher education accrue to the individual student but also to the American society and national economy as more people increase their skills, knowledge and earning power. As employees, parents, business people, entrepreneurs, and many other ways, college educated people contribute to the Nation. It is the policy of the U.S. Government that costs should not be a barrier to educational opportunity. Direct student loans are a vital element of that policy.

Last Updated: August 18, 2015