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How federal Direct Subsidized Loans work

They might be the best deal out there — but can they cover all your costs?

Direct Subsidized Loans are one of the most affordable federal loans out there for undergraduate students, though borrowing limits might mean they won’t be able to cover your entire cost of attendance.

How do federal Direct Subsidized Loans work?

As part of the William D. Ford Federal Direct Loan Program, federal Direct Subsidized Loans work by giving undergraduate students with financial need low-cost funding with favorable rates and terms. Aside from low interest rates, the government covers — or subsidizes — any interest that adds up while you’re in school or on deferment.

Graduate students and parents aren’t eligible for this loan, regardless of their financial need.

How much can I borrow?

How much you can borrow depends on two main factors: your financial need and your year in school.

Financial need

The government calculates your financial need by using the following formula:

Cost of attendance (COA) – Expected family contribution (EFC) = Financial need

  • Cost of attendance (COA). The cost of attendance is how much your school expects you to pay in tuition, room and board and other miscellaneous costs. You can typically find an estimate of your school’s COA on its financial aid website.
  • Expected family contribution (EFC). How much your family is expected to pay depends on a wide range of factors like income, investments and other assets. The Department of Education (DoE) offers a worksheet you can use to calculate your EFC.

Annual limits

Regardless of need, the DoE caps how much students can borrow based on what year they are in school:

  • First-year limit: $3,500
  • Second-year limit: $4,500
  • Third-year and beyond limit: $5,500

Subsidized loans come with a lifetime limit of $65,000. With the average annual cost of attendance clocking in at over $20,000 per year, this means most students won’t be be able to cover their cost of attendance with subsidized loans alone.

Time limit for Direct Subsidized loans

In addition to having a cap on how much you can borrow, the Department of Education places a limit on how long you can receive a Direct Subsidized Loan. You can only get this type of funding for 150% of the the length of your program. So, if you attend a four-year undergraduate program, you can only receive Direct Subsidized Loans for six years.

If you enroll in a new program of a different length, however, the time limit also changes to reflect the length of that program. For example, if you switch from a four-year to a two-year program, your eligibility decreases from six years to three years.

How much does it cost?

  • Interest rate: 2.75%
  • Origination fee: 1.059%

There are two costs to consider when you take out federal student loans: the interest rate and loan fee. The interest rate is the percentage of your unpaid balance you pay each year — except while you’re in school, during your grace period or when you go into deferment.

The origination fee is a one-time cost the DoE deducts from your loan amount. This means your loan balance will be slightly larger than the funds your school receives.

Every student gets the same rates and fees, which Congress sets every July.

When do I have to pay interest?

The fact that the government will cover interest payments on a Direct Subsidized Loan is what sets it apart from other student loans.

Generally, you don’t have to pay interest under the following circumstances:

  • When you’re in school
  • During the six-month grace period after you leave school or drop below half time
  • When you go into deferment

However, you’re responsible for paying interest if you lose eligibility for Direct Subsidized Loans and you:

  • Stay enrolled in your program
  • Enroll in another program of the same length or shorter before graduating
  • Transfer to a shorter program

Am I eligible for a Direct Subsidized Loan?

To be eligible for a Direct Subsidized Loan, you need to meet the following criteria:

Undergraduate students can find out if they’re eligible for a subsidized loan when they fill out the Free Application for Federal Student Aid (FAFSA).

Can I get a Direct Subsidized Loan with bad or no credit?

You can. The Department of Education doesn’t consider your credit score when you apply for a Direct Subsidized Loan. In fact, most borrowers likely don’t have a credit score when they apply, since this program is only open to undergraduates.

What are my repayment options with a Direct Subsidized Loan?

You won’t have to make payments on your Direct Subsidized Loan until six months after graduating, leaving school or otherwise dropping below half time. After that, you have your pick of nearly all of the repayment plans offered for federal loans. It isn’t eligible for the Income-Sensitive Repayment Plan, which is only available to the FFEL Loan Program.

Repayment programTermsHow it worksEligible for federal forgiveness?
Standard Repayment Plan10 yearsMake the same fixed repayment each month.
  • Teacher Loan Forgiveness
Graduated Repayment Plan10 yearsMake repayments that increase over time — usually every two years.
  • Teacher Loan Forgiveness
Extended Repayment Plan25 yearsMake either fixed repayments or repayments that increase over time — usually every two years.
  • Teacher Loan Forgiveness
Revised Pay as You Earn(REPAYE) Repayment Plan 20 yearsMake monthly repayments of 10% of your income until the loan term is up. The DoE forgives any remaining balance after the term is up.
  • Teacher Loan Forgiveness
  • REPAYE forgiveness
  • Public Service Loan Forgiveness (PSLF)
Pay As You Earn (PAYE) Repayment Plan20 yearsMake monthly repayments of 10% of your income or what you’d pay on the Standard Repayment Plan — whichever is less. The DoE forgives the remaining balance after the term is up.
  • Teacher Loan Forgiveness
  • PAYE forgiveness
  • PSLF
Income-Based Repayment (IBR) Plan20 yearsMake monthly repayments of 10% of your income or what you’d pay on the Standard Repayment Plan — whichever is less. The DoE forgives any remaining balance after the term is up.
  • Teacher Loan Forgiveness
  • IBR forgiveness
  • PSLF
Income-Contingent Repayment (ICR) Plan25 yearsMake monthly repayments of 20% of your income or what you’d pay on a 12-year plan with fixed repayments — whichever is less. The DoE forgives any remaining balance after the term is up.
  • Teacher Loan Forgiveness
  • ICR forgiveness
  • PSLF

Federal student loan repayment plans explained

Does the Direct Subsidized Loan program offer deferment or forbearance?

Yes. Direct Subsidized Loan holders are eligible for all of the types of deferment and forbearance the federal government offers, excluding Parent PLUS forbearance. Both options allow you to pause repayments for a variety of reasons, including going back to school or if you get injured and need to take time off work.

With all subsidized federal loans, you don’t have to pay any interest that adds up during deferment. However, you’re responsible for paying interest that adds up during forbearance.

How student loan deferment and forbearance works

Is interest capitalized during deferment and my grace period?

No. With Direct Subsidized Loans, the government pays the interest that adds up during deferment and your grace period. When interest is capitalized, any unpaid interest gets added to your balance, making your student loans even more expensive. But with this program, there is no interest to capitalize.

Can I qualify for forgiveness with a federal Direct Subsidized Loan?

Yes, though having a Direct Subsidized Loan isn’t enough to make you eligible for forgiveness on its own. Most forgiveness programs require you to commit to working an eligible job for a certain number of years. At the very least, you must enroll in an income-based repayment program.

10+ student loan forgiveness programs explained

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Bottom line

Direct Subsidized Loans are often the first choice for students who can qualify. They come with lower rates than most other student loans, are eligible for all repayment, deferment and forbearance programs, and interest doesn’t add up while you’re in school or during deferment.

But low annual limits might mean you need to combine it with other types of financial aid. Explore your other options with our guide to student loans.

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