Direct Subsidized Loans

A Direct Subsidized Loan is a great financial option to help make education more affordable for students. The Federal Subsidized Loan is a needs-based program.

It targets those students who demonstrate the most financial need. The loans are primarily available to undergraduates. However, graduates in specific medical professional programs may qualify for the loan.

With this loan, the U.S. Department of Education pays the interest on the loan during the borrower’s grace period. There are annual and aggregate loan limits for the program, and once a borrower exceeds that amount, they are no longer eligible to receive further subsidized loans. Once they leave school, borrowers have several options to repay the loan, each of which corresponds to their current income and financial situation. See below for detailed information on Direct Subsidized Loans, how to qualify and the steps required to apply for one.

What is a Direct Subsidized Loan?

A Direct Subsidized Loan is a federal loan made to students in a program of study leading towards a degree or certificate at an approved school. Federal Subsidized Loans are granted based on a student’s financial need. With this type of loan, the U.S. Department of Education pays the interest on the loan during the student’s grace period. The grace period includes times when the student is enrolled at least half-time, the first six months after school and during periods of deferment.

Related Article: Direct Unsubsidized Loans

The student’s school determines the loan amount based on the information entered on the students Free Application for Federal Student Aid (FAFSA). The loan may be used for expenses related to the student’s education, such as:

  • Tuition and fees
  • Books
  • Dependent childcare
  • Transportation
  • Purchase or rental of a personal computer

The funds are disbursed each semester. Payments are sent directly to the school who then applies the money to the student’s account. If there is a balance after paying expenses, the school sends the balance to the student. Not all schools participate in the Direct Subsidized Stafford Loan program, and students must contact their school to determine if the loans are available.

A Direct Subsidized Loan has many benefits over private loans. Federal loans have a fixed interest rate while private loans may have a variable interest rate, which ultimately increases the cost of the loan. Students do not need to pass a credit check with federal loans, and the loans do not require a co-signer (except PLUS Loans). Also, borrowers may consolidate their Direct Subsidized Loans at the end of the loan term. Consolidating loans means the student makes one payment for their loans rather than paying several private lenders for each loan they receive.

Direct Subsidized Loan Eligibility Rules

The Federal Direct Subsidized Stafford Loan is only available to undergraduate students. Also, the applicants for a Direct Subsidized Loan must be enrolled at least half-time a program that leads to a degree or certificate. When applying, students must meet the general eligibility requirements for federal student aid as follows:

  • Be a U.S. citizen or eligible non-citizen
  • Possess a Social Security Number
  • Not in default on any federal student loans
  • Make satisfactory progress towards a degree or certificate

The Federal Subsidized Loan is a needs-based program. As such, students must demonstrate a financial need to qualify. The school uses the information on the student’s FAFSA to make the determination. When evaluating a student’s application, the school looks at the following information to determine what is known as the Expected Family Contribution (EFC):

  • Student’s annual income
  • Annual income for the student’s parent(s)
  • Amount of other financial aid the student receives

The school then calculates the applicant’s financial need by subtracting the EFC from the Cost of Attendance (COA). The remaining amount is the amount the student requires to pay for their education. Students are not able to qualify for federal loans above and beyond their financial need. If the school determines that the applicant’s income is too high to qualify, they must seek other sources of funding for their education such as other federal programs or private loans and scholarships.

Although the loans are primarily for undergraduates, there are special cases when graduate students qualify for the program. Those students in specific health fields are eligible for a loan. These students should contact their financial aid office to determine if their program of study qualifies for a Federal Subsidized Loan.

Maximum Loan Amount for a Federal Subsidized Loan

There is a limit on the amount of Direct Subsidized Stafford Loans a student may receive per academic year. The U.S. Department of Education also enforces an aggregate or lifetime loan limit on the amount of Direct Subsidized Student Loans that a student may receive. The loan limits are based on the student’s year of study as follows:

  • First Year: $5,500 for dependent students and $9,500 for independent students
  • Second Year: $6,500 for dependent students and $10,500 for independent students
  • Third Year and Beyond: $7,500 for dependent students and $12,500 for independent students

The aggregate loan limit for undergraduate students is $31,000 for dependent students and $57,000 for independent students. Once the student reaches the lifetime limit, they are no longer eligible to receive further Federal Subsidized Loans.

Graduate students in an approved program of study qualify for an annual $20,500 loan limit. The aggregate loan limit for graduate and professional degree students is $224,000.

Applicants for a Direct Subsidized Loan may get an early estimate of how much they qualify for by using the Early Aid Estimate calculator, otherwise known as FAFSA4Caster, on the Federal Student Aid website. The calculator is for students who are not ready to submit a FAFSA but who wish to see how much they would qualify for based on their current information. It is also a valuable tool for parents to forecast how much they will need to fund their child’s education.

How to Apply for a Direct Subsidized Loan

Applicants for a Federal Direct Subsidized Stafford Loan must apply for the loan using the FAFSA. The form collects information necessary for the school to determine the student’s eligibility and the Direct Subsidized Loan amount for which they qualify. To apply, students must submit information about their income as well as that of their parent(s). Information required on the FAFSA include:

  • Student’s full name
  • Date of Birth
  • Social Security Number
  • Income

The student must also list several schools they wish to receive their FAFSA. Once approved for the loan, the student must sign a Master Promissory Note (MPN). The MPN is a contract between the U.S. Department of Education and the student. The contract serves as the student’s agreement to repay the Federal Subsidized Loan under the terms outlined in the contract. Also, students must undergo entrance counseling once they are approved for the loan.

Repaying Federal Subsidized Loans

Applicants do not begin repayment of their Direct Subsidized Loan until after their grace period. Once the grace period a Direct Subsidized Loan ends, the loan servicer contacts the student to provide instructions on how to make payments. The loan servicer is who manages the loan by collecting payments and late fees, determining late charges and answering all questions related to the loan.

The loan payment consists of two components, namely the principal amount and the interest. The amount of interest is calculated based on the current interest rate for the loan. The interest rate amount is added on top of the principal payment.

Borrowers have several options for repaying their Federal Subsidized Loan based on their financial situation. In general, loans are repaid within 20 to 25 years based on the payment plan selected. The repayment options available are:

  • Standard – Under this plan, borrowers pay a fixed monthly amount for the duration of the loan term
  • Graduated – Loan payments are lower in the beginning to allow the student time to adjust to the new loan payment. The payment then increases over time to help accelerate paying off the loan.
  • Income-Based – With an income-based plan, the monthly payment varies based on the borrower’s current income.

Borrowers also have the option of consolidating their loans. First, understand what loan consolidation is before deciding if it is right for you. Consolidation helps borrowers combine their loans so that they make one payment for their Federal Subsidized Loan instead of payments spread out across multiple loans.

Related Article: FAFSA Repayment

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