What Is a Federal Direct Subsidized Loan?

By Kayla McCormack · November 19, 2021 · 6 minute read

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What Is a Federal Direct Subsidized Loan?

Federal Direct Subsidized Loans are available to students who demonstrate financial need. The federal government subsidizes this type of loan by paying the interest that accrues while the student is enrolled at least half-time and during qualifying periods of deferment, such as the grace period.

It’s one of three federal student loans available to student borrowers. The others include Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans. Read on for more information about the benefits of Direct Subsidized loans and details about other types of student loans available to eligible students.

What Are the Benefits of a Federal Direct Subsidized Loan?

Like any other student loan, you will be responsible for paying back your Federal Direct Subsidized Loan after you finish school, but unlike many other student loans, you won’t be responsible for paying interest while you are in school or during your grace period. The government subsidizes this type of loan by paying the interest on your behalf.

Since the government is paying the interest, it is not capitalized on the loan when you graduate. When interest is capitalized, it means it is added to the principal value of the loan. This becomes the new principal value and interest will accrue based on this new balance. Since there is no interest to capitalize, the amount you originally borrowed and the amount you’ll have to repay after your grace period ends will be the same.

Recommended: Understanding Capitalized Interest on Student Loans

Interest on a Direct Subsidized Loan won’t start accruing until the grace period is over. This might sound like a minor detail, but not having to pay interest while you are in school can drastically cut down the overall cost of your loan.

Other benefits of a Federal Direct Subsidized Loan? Like other federal student loans, you are not obligated to make payments during school.

How Do You Apply for a Federal Direct Subsidized Loan?

In order to apply for a Federal Direct Subsidized Loan, you will need to complete the Free Application for Federal Student Aid, more commonly known as FAFSA®. The FAFSA is available for free online, and contains questions about you and your family’s financial circumstances.

The information you submit through the FAFSA is transmitted to your school, and is used to determine what types of aid and how much for which you may be eligible. The FAFSA must be completed annually.

How Is Your Eligibility for a Federal Direct Subsidized Loan Determined?

After the FAFSA has been reviewed, you will receive a Student Aid Report , which will explain your eligibility for the various types of federal financial aid. What type of aid and how much aid you are eligible for depends on many different circumstances, including the amount the federal government expects you and your family to contribute to your educational costs, your current enrollment status in school, and the cost of attending your particular college.

The financial aid staff at your school is responsible for determining exactly how much and what type of federal loans you are eligible for.

Because Federal Direct Subsidized Loans are a need-based form of federal financial aid, you must meet certain eligibility requirements to qualify. These requirements are largely based on your expected family contribution, or how much the federal government expects that you and your family can put towards your educational expenses.

There are also limits on the amount of subsidized loans you can borrow each year, regardless of your financial need. For the 2021-2022 school year, the limit on subsidized loans was $3,500 for first-year undergraduates, $4,500 for second-year undergraduates, and $5,500 for third-year undergraduates and beyond.

Graduate and professional students are not eligible for Direct Subsidized Loans.

Paying Back a Direct Subsidized Student Loan

Like other types of student loans, you will need to start paying back your Federal Direct Subsidized Loan if you leave school or after graduation. After graduation, borrowers with Federal Direct Subsidized Loans are eligible for a six-month grace period before repayment is required.

Some people with Direct Student Loans may potentially qualify for Public Service Loan Forgiveness (PSLF). PSLF is available to qualifying college graduates who work in certain fields like government, the nonprofit sector, or healthcare, and allows some federal student loans to be forgiven after 10 years of qualifying payments.

Actually getting approved for PSLF can be extremely challenging due to stringent requirements. In October 2021, the the Department of Education announced plans to overhaul the program in order to improve upon the program’s accessibility.

Beyond Subsidized Loans: Other Options Available to Student Borrowers

Since borrower eligibility for Direct Subsidized Loans is based on borrower need, and there are annual borrowing limits, students may be interested in learning about other loan options available to them. There are three other types of federal loans and some borrowers may consider private student loans.

The three types of federal loans available outside of Direct Subsidized Loans are:

•   Direct Unsubsidized Loans. These loans are available to undergraduate and graduate students. Unlike Direct Subsidized Loans, borrowers are responsible for paying the interest on these loans while they are enrolled in school and during their grace period. Eligibility is not based on financial need.

•   Direct PLUS Loans. PLUS Loans are options for graduate and professional students, or parents of students who are interested in borrowing a loan to help their child pay for college. Eligibility for this type of loan is not based on need, but the application process does require a credit check.

•   Direct Consolidation Loan. This federal loan isn’t awarded to borrowers as a part of their financial aid package. Instead, a Direct Consolidation Loan allows borrowers with multiple federal loans to combine (or consolidate) them into a single loan. The loan’s new interest rate is the weighted average, rounded up to the nearest one eighth of a percent, of the interest rates on the existing loans.

Private student loans are offered by private lenders. They are not required to offer the same borrower benefits or protections — think of things like PSFL or income-driven repayment plans — as federal student loans. Because of this, private loans are generally considered after borrowers have reviewed all of their other financing options.

Recommended: A Guide to Private Student Loans

To apply for private student loans, potential borrowers will need to fill out an application directly with the lender of their choice. The loan’s terms and interest rates will be influenced by factors including the borrowers financial situation and credit history, among others.

The Takeaway

Borrowers with Federal Direct Subsidized Loans are not responsible for the interest that accrues while they are enrolled in school at least half-time or during the grace period or other qualifying periods of deferment. The interest is subsidized by the U.S. government. To qualify for this type of federal student loan, borrowers must be qualifying undergraduate students who demonstrate financial need.

Other options for students looking to pay for college may include Direct Unsubsidized or PLUS Loans, scholarships and grants, or work-study. After reviewing those options, borrowers still looking for resources to pay for school may consider private student loans as an option.

SoFi offers private student loans for undergraduate and graduate students or their parents and there are no fees — that means there are no late fees, no application fees, or origination fees.

Interested in learning more about using a private student loan to pay for college? See what SoFi has to offer.

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SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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