A Guide to Subsidized Loans

Subsidized loans are federal student loans that make it more affordable for students to attend college. However, subsidized loans are allocated based on financial need. The loan amount awarded is dependent on income.

Subsidized loans are given to students and families with a demonstrated financial need. In the United States, the student loan program is governed by the U.S. Department of Education. The DOE permits accredited four-year learning institutes, which can be traditional colleges, vocational schools or technical schools, to provide financial assistance for qualifying students, says Federal Student Aid, which is a special branch within the DOE. Each school is granted a set amount of money to provide for its students. Among the students, that money is divided based on a tiered income scale.

What Are Subsidized Loans?
In addition to subsidized loans, the DOE also allocates unsubsidized loans. A distinction between the two types of loans is that funding for subsidized loans is available only for students enrolled in undergraduate studies, while unsubsidized loans can be awarded to undergraduate and post-graduate students. Unsubsidized loans are granted independent of income level, but they are awarded based on how much a student requests to have loaned to them over the course of the college education. Other factors, such as how much money the student's school has been given by the DOE, and any other types of financial aid the student receives factor into the equation of how much money he or she receives in loans.

As with any other type of loan, federal subsidized loans are given out under the condition that the student will repay the loan in full and in a certain period of time. However, a main difference between subsidized loans and unsubsidized loans is the government assumes the responsibility for paying interest on students' loans when they are subsidized, while students must pay interest out of pocket for loans that aren't subsidized.

Students must meet several conditions for the government to pay interest on subsidized loans. One such requirement is that the student is enrolled in school for at least half the year over the course of his or her education. The government will also cover payment of interest on loans for the first half year after the student graduates. This is called a grace period. After that amount of time, however, the student is required to start paying any remaining interest along with the balance of the loan. Students (and graduates) who are not financially capable of paying the loan are eligible to postpone loan payments for a certain period of time, which is called deferment. Some loans, such as Direct Subsidized Loans and Direct Consolidation Loans, do not continue to accrue interest over the length of time that they are in deferment.

Loan Conditions
Students who have existing subsidized loans, or who wish to take them out in the future, should be aware that loans allocated after July 1, 2013, are subject to a 150 percent loan cap, according to the DOE. This means that students can only borrow money for a specific amount of time to help cover the cost of their tuition. A person enrolled in a four-year program, for example, can only have loan extended for six years to help cover the cost of tuition. After that amount of time, the student is responsible for repaying the balance of the loan and any remaining interest. He or she can still receive assistance through an unsubsidized loan, however.