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A federal student loan could be a good choice if you consider paying for your education. Federal student loans can be of two types: subsidized or unsubsidized.
A subsidized loan is a federal loan for undergraduate students who demonstrate financial need. This form of loan does not collect interest in the same manner that other loans because the federal government is the one responsible for paying the interest during the loan term. Below, we will look closer at a subsidized student loan and how to receive it.
What Is a Subsidized Loan?
Subsidized loans are provided to undergraduate students who are in financial need, as determined by the cost of attendance minus the projected family contribution and other financial aid (such as grants or scholarships).
During the time you are enrolled at least half-time, or during deferment periods, you will not be charged with interest in your subsidized federal student loans. To be eligible for a subsidized loan, also known as a federal direct subsidized loan, you should complete the Free Application for Federal Student Aid (FAFSA).
Subsidized vs. Unsubsidized Loans
Direct loans from the federal government are available in two forms: subsidized and unsubsidized. If you take out subsidized loans instead of unsubsidized loans, you will pay less interest in the long run.
Subsidized student loans
Only undergraduate students who demonstrate financial need can apply for the federal subsidized loan program. Needs are measured by your cost of attendance, your estimated family contribution, and another financial aid package (such as grants or scholarships). Subsidized student loans do not accumulate interest as long as you are enrolled at least half-time in school or while you are on deferment from school.
Unsubsidized student loans
Unsubsidized federal loans are available to both undergraduate and graduate students and are not based on financial need. Your eligibility is determined by the cost of attendance, and any additional financial help (such as grants or scholarships).
During the in-school, deferment, and grace periods, interest is levied. Unlike a subsidized student loan, you are liable for the interest in an unsubsidized loan from the time it is disbursed until it is paid in full. You have the option of paying the interest or allowing it to accrue and be capitalized (these payments add to the principal amount of your loan). Capitalizing interest increases the amount you must repay.
You are able to get both unsubsidized and subsidized loans at the same time. Your federal student loan enters repayment whenever you graduate, drop below half-time attendance, or leave school. If you borrowed a subsidized or unsubsidized loan, you have a six-month grace period before you should begin making monthly payments.
Because of the pandemic, payments and interest on these loans were suspended in 2020 and got resumed by mid-2022.
Pros and Cons
Getting subsidized loans has both advantages and disadvantages. They are:
Pros
Rates and fees are lower than for direct unsubsidized loans and private loans.
You do not require a good credit history or a co-signer.
Extra time to put a hold on payments.
The amount of accrued interest is lower.
Time before subsidized student loans default up to three months.
Cons
The annual amount of federal direct subsidized loans you can borrow is limited. It is determined by the federal direct loan program, financial necessity, and the school year. If you need more than the annual loan limit, you may receive unsubsidized or private student loans.
Only undergraduate students are eligible for this government loan.
To be eligible, you must show that you have a financial need. If your parent has a high income, or if your income is too high, if you are not considered a dependent, you may not be eligible.
How to Apply for a Subsidized Loan
Before you can get federal student loans through the Direct Loans program, you need to fill out the Free Application for Federal Student Aid (FAFSA).
A Direct Subsidized Loans ApplicationGuide
Step 1: Completing free application for Federal Student Aid (FAFSA)
Filling out the Free Application for Federal Student Aid (FAFSA) provided by the government is the initial step in submitting an application for federal student loans. The FAFSA includes several questions concerning the student's and parents' income and investments and other important information, like if the family will have more than one student in college at the same time.
The FAFSA will calculate your Expected Family Contribution (EFC) based on the information you provide. That is the amount of money the government considers you should be able to pay for college on your own in the upcoming school year. You may fill out the FAFSA online at the Federal Student Aid website.
The FAFSA application for the following school year will be available on October 1. To save time, gather all of your account information before sitting down to work on it. If you want to continue receiving financial aid, you must not only complete the FAFSA when you initially apply for it but also every year after that.
Step 2: Receiving a financial aid
The financial aid offices at the institutions you apply to will use the information from your FAFSA to calculate how much money you will get. They calculate your requirement by deducting your EFC from their cost of attendance (COA).
Colleges will put up an assistance package that may include federal grants, paid work-study, and loans to cover the difference between your EFC and their COA. Grants, unlike loans, do not have to be repaid unless under exceptional circumstances. They are aimed at students who have "extreme financial need," according to the government.
Step 3: Sign any supporting documentation, such as the Master Promissory Note (MPN)
The Master Promissory Note (MPN) is a legal document in which you engage to repay the US Department of Education with your federal loans and any accrued interest and fees. It also describes the loan's terms and restrictions.
You may get several federal student loans under an MPN throughout ten years to pay for your educational costs if the school uses the MPN in this form.
How You Can Receive Direct Subsidized Loans
Your loan money will first be applied to your school account to pay for tuition, fees, room and board, and other school-related expenses. You will get a repayment of the loan money in the case if there are any leftover funds. All loan money must be spent on education-related costs.
If you are a first-year undergraduate student and a first-time borrower, your school may require you to wait 30 days following the first day of your enrollment term (semester, trimester, etc.) before receiving your loan funds. Check with your school to discover if this regulation applies to you.
Main Requirements for Subsidized Student Loan
To be eligible for a subsidized student loan, you must satisfy the following criteria:
You must be a US citizen, national, or permanent resident,
Attending school at least half-time,
Never be in default or owe a return on a previous student loan or financial aid,
Maintain a high academic standing, and
Have a financial need.
How Much You Can Borrow
Each academic year, your institution chooses the loan types and the amount of loan you may receive. However, there are restrictions applied on the amount of subsidized and unsubsidized loans you may get each academic year (annual loan limits).
The overall amount you can borrow for undergraduate and graduate studies (aggregate loan limits). The actual loan amount you may get each academic year may be less than the annual limit.
These restrictions differ based on:
What school year you are in, and
Whether you are an independent or dependent student.
First-Year Undergraduate Annual Loan Limit is $5,500 for dependent students and $9,500 for independent students. Subsidized loans may not exceed $3,500 in total.
Second-Year Undergraduate Annual Loan Limit is $6,500 for dependent students, and $10,500 for independent, subsidized loans may not exceed $4,500 of this total.
Third Year and Beyond Undergraduate Annual Loan Limit is $7,500 for dependent students and $12,500 for independent ones. Subsidized loans may not exceed $5,500 in total.
Subsidized and Unsubsidized Aggregate Loan Limits are $31,000 for dependent students and $57,500 for undergraduate independent ones. No more than $23,000 of this amount may be in subsidized loans. For independent professional students, this amount is $138,500, of which no more than $65,500 may be in subsidized loans.
All federal loans earned for undergraduate studies are included in the graduate aggregate limit.
How to Repay a Subsidized Loan
There are several repayment alternatives available to fit the specific demands of borrowers. Your loan servicer is the best person to assist you in understanding the many options available to you for making repayments. Depending on the repayment schedule you choose, you will typically have 10 to 25 years to repay the debt.
Borrowers of federal student loans, both subsidized and unsubsidized, are not required to make payments while in school. However, unsubsidized loans will accumulate interest. Borrowers enter a six-month grace period after graduating, decreasing below half-time attendance, or quitting school. Unsubsidized loans continue to accrue interest, whereas subsidized loans do not.
When the six-month time is up, repayment will formally commence. Interest will be included in your monthly student loan payment regardless of the type of loan you have.
Prioritize your unsubsidized loans while planning your repayment strategy. Because loans earn interest while you are in school, your loan amounts will increase unless you make interest payments.
Legal Regulations
Federal student loans became available to the US students in 1958 with the approval of the National Defense Education Act (NDEA). They were made more common in the following 1965, with the adoption of the Higher Education Act.
The first major government loan program in the USA were formed in 1973 - Student Loan Marketing Association.
If you are paying for your higher education using a government loan, you most likely have a Federal Stafford Loan. They are the most frequent form of student loan given by the Department of Education, the government organization in charge of providing money to students.
They were named for Vermont Senator Robert Stafford, a supporter of public education in the United States. Stafford Loans have been managed by the William D. Ford Federal Direct Loan Program since 2010.
Stafford Loans, also known as Direct Loans, are subsidized and unsubsidized loans made available by the federal government to qualifying students to help them pay for higher education at four-year colleges and universities, community colleges, and vocational or technical institutions.
Stafford Loans are preferred to bank or financial institution loans for several reasons: they have lower interest rates, are quicker to secure, and offer flexible repayment periods and alternatives designed to assure manageable monthly payments.
The True Cost of a Subsidized Loan
When comparing student loans, subsidized loans come out on top. If you qualify, you'll pay less in interest charges and save money over the life of your loan with subsidized loans.
The interest rates for federal loans, both subsidized and unsubsidized, are the same and stay fixed for the duration of the loan. The interest rate on undergraduate loans taken out between July 1, 2019, and June 30, 2020, is 4.53%, while the interest rate on graduate loans is 6.08%.
During the Covid-19 outbreak, federal loan borrowers are getting unprecedented repayment help in the form of automatic forbearance and a reduction in interest rates. The federal government requires no monthly payments and has reduced interest rates to 0% for debtors in repayment between March 2020 and September 2021. This implies that borrowers' loan amounts will not increase throughout the forbearance period.
All Direct Subsidized and Direct Unsubsidized Loans apply a loan fee. This fee is calculated as a percentage of the loan amount and is taken proportionally from each loan disbursement. The loan cost is 1.057% on or after October 1, 2020, but before October 1, 2022.