More students than ever before are borrowing to cover their tuition and expenses due to the rising cost of education. Federal student loans can be subsidized or unsubsidized. If you can demonstrate financial need, you may be able to qualify for a subsidized loan, where the government pays some interest on the loan. Knowing how this loan works, the loan limits, and the interest rates you may have to pay will help you prepare for college.

What Is a Subsidized Loan?

When applying for a federal student loan, understanding the difference between subsidized vs. unsubsidized loans is crucial. Subsidized loans are available for undergraduate students with financial need. When you complete the application form for a federal student loan, your school will notify you whether you qualify for a subsidized or unsubsidized loan.

With a subsidized loan, you receive a grace period of six months after graduating for repayment. The government will pay the interest on the loan while you’re in school, during periods of deferment, and during the grace period.

How Subsidized Loans Work

Only undergraduates can get subsidized loans. If you qualify for the loan, the government will pay the interest during the deferment period, grace period, and while you’re in school. The interest rates are much lower when compared to private student loans. For example, loans disbursed between July 1, 2023, and July 1, 2024, will have an interest rate of 5.50%. The interest rates are fixed for the term of the loan.

Eligibility Requirements

Subsidized loans are available to students who meet the following eligibility requirements:

  • Undergraduate student
  • Demonstrated financial need determined by the FAFSA
  • Half-time enrollment in an eligible certificate or degree program
  • U.S. citizen, national, or eligible non-citizen
  • Meet eligibility criteria for federal student aid and direct loan program
  • Satisfactory academic progress
  • No default on any federal loans

How Much You Can Borrow With Subsidized Loans

Your school will determine what type of loan you qualify for and the loan amount you can borrow. There are aggregate loan limits in subsidized loans for how much you can borrow for your undergraduate degree. The annual loan limits will vary depending on what year you are in school and whether you are an independent or dependent undergraduate student.

Dependent and independent students can receive no more than $23,000 in subsidized loans over the course of their degree, but they may be eligible to get more through direct unsubsidized loans.

Examples of Subsidized Loans

Let’s look at an example of a subsidized loan to understand how it works better. Let’s say you’re a first-time borrower and are interested in enrolling in an eligible college program. Once you determine the right institution to attend, you realize you’re short of $10,000 to cover the cost of attendance. You apply for an academic year-based subsidized loan of $10,000 for the whole college term of four years. The loan term is nine years.

After you graduate, you have five years to repay the loan. When you start attending college, the government will pay the interest on the loan for four years. The loan also has a grace period of six months. Once you graduate, the government will still make interest payments for the grace period of six months. After that, you’ll have a loan principal of $10,000, and you’ll start paying installments each month consisting of the principal and interest until you repay the loan in full.

How to Apply

To apply for subsidized loans, you’ll need to follow these steps.

1. Complete the FAFSA

The first thing you’ll need to do is to fill out the Free Application for Federal Student Aid (FAFSA) form. The form is available at, and you can fill it out and submit it online. The school will use the information you provide to determine what type of loan and how much you’re eligible to receive. You’ll also have to attend entrance counseling to qualify for the loan.

2. Get the Financial Aid Award Letter

Once your school reviews your application, it will determine whether you qualify for a subsidized loan. If you do, it will be included in your financial aid package. You’ll receive the financial aid award letter by email or mail. The letter will provide information about the loan.

3. Sign the Paperwork

Once you receive the letter, you’ll need to contact the financial aid office at your school and accept the student loan. You’ll also have to sign the Master Promissory Note and other paperwork to finalize the terms and get the disbursement of loan funds.

Pros and Cons of Subsidized Loans

While there are many benefits of getting a subsidized loan, such as a grace period and deferred interest, there are also a few drawbacks you should be aware of.


  • The federal government pays the interest on the loan while you’re in school and during the grace period.
  • The interest rate on subsidized loans is lower compared to unsubsidized loans.
  • You’ll have a six-month grace period after graduation.
  • You can temporarily postpone or defer repayment of loans or get on an income-driven repayment plan if you’re having trouble keeping up with payments.


  • The loans are only available to undergraduate students.
  • You must demonstrate financial need to qualify.
  • The lending limits are lower, so they may not cover your entire cost.

Teresa Dodson, founder of Greenbacks Consulting and debt expert, encourages students to consider these loans as the best option to finance college tuition. “Subsidized loans are low-interest and an effective way to achieve goals for funding your educational future,” Dodson says. 

Tips To Avoid Defaulting on Loan Payments

Once your grace period is over, you’ll have to start making payments on the loan. As a new graduate, you may find it challenging to keep up with loan repayment along with your other bills. Here are a few tips to avoid defaulting on the payments:

  • Make a budget to get a clear picture of your income and expenses. Prioritize important expenses such as groceries, housing costs, and transportation. Add in your debt repayment. Budget for discretionary expenses based on how much you have left over each month after accounting for these expenses.
  • Start putting aside a little money each month to cover unexpected expenses so you don’t have to rely on emergency loans.
  • Set up autopay to ensure you don’t miss payments on the loan.
  • If you think you won’t be able to make your loan payments, get in touch with your loan servicer immediately.
  • Evaluate different repayment options, such as an income-based repayment plan, forbearance, and deferment, to see which one may be right for you.
  • If you have multiple federal student loans, see if consolidation will be a good option for you.

The Bottom Line on Subsidized Loans

Subsidized loans can help you pay for college even if you don’t have the financial resources to do so. Just remember that you’ll eventually have to repay the loan with interest once you graduate. Carefully evaluate how much you need to borrow and the type of repayment plan that will work for you.