If you’re applying to college, you may be hearing a lot about the different types of federal student loans that you might qualify for. Direct Loans are some of the most common federal student loans, but they come in two varieties: Unsubsidized, and Subsidized.
Here, we explore Direct Subsidized Loans so that you have all of the information that you need to make an informed decision while applying for and accepting your financial aid.
What is a Direct Subsidized Loan?
Direct Subsidized Loans are a special type of federal student loan created under the William D. Ford Federal Direct Loan Program. These loans are sometimes also known as Subsidized Stafford Loans, for this reason. They are made available to undergraduate students who demonstrate exceptional financial need in their FAFSA Application.
These loans are called Direct Subsidized Loans because the federal government subsidizes them for borrowers, making them less expensive to borrow compared to Direct Unsubsidized Loans. This means that the federal government pays any interest that accrues on your loans when:
- You are actively enrolled in school at least half time
- During your six-month student loan grace period after you leave school
- During any period of deferment
Over the life of the loan, these subsidies can save you hundred, if not thousands, of dollars.
What is the interest rate on a Direct Subsidized Loan?
Federal student loan interest rates vary depending on the year in which they were disbursed. They are set by Congress.
Direct Subsidized Loans disbursed between July 1, 2019 and July 1, 2020 carry a 4.53% interest rate. Those disbursed between July 1, 2018 and July 1, 2019 carry an interest rate of 5.05%.
Do Direct Subsidized Loans have any fees?
In addition to interest, you will be charged a loan origination fee. This fee is a percentage of the total loan amount. The loan origination fee varies by year:
- For loans disbursed between October 1, 2017 and October 1, 2018 it is 1.066%
- For loans disbursed between October 1, 2018 and October 1, 2019 it is 1.062%
- For loans disbursed between October 1, 2019 and October 1, 2020 it is 1.059%
How much can you borrow?
In total, qualified undergraduates can borrow $23,000 in Direct Subsidized Loans. The amount you can borrow each year of your undergraduate degree varies:
- During your first year you can borrow $3,500 in subsidized loans
- During your second year you can borrow $4,500 in subsidized loans
- During your third year (and beyond) you can borrow $5,500 in subsidized loans
Typically, your school will determine exactly how much you can borrow each year and notify you of this amount in your financial aid package.
Direct Subsidized Loan Eligibility
To qualify for a Direct Subsidized Loan, you must:
- Be enrolled at least half-time in college
- Be enrolled in a program that will award you with a degree or certificate upon completion
- Be an undergraduate student; graduate students do not qualify
- Be able to prove financial need, as determined through your FAFSA application
How to Apply for a Direct Subsidized Loan
By completing our FAFSA application, you will automatically apply for all types of financial aid. If you are eligible to receive a Direct Subsidized Loan based on your FAFSA application, your school will notify you in your financial aid package. You can submit a FAFSA application here.
Direct Subsidized Loan Repayment Plans
Whether your Direct Loan is subsidized or unsubsidized, the U.S. Department of Education is your lender. That being said, your loan will be serviced by one of 11 federal student loan servicers. Your servicer will accept your monthly payments, advise you of your repayment options, and otherwise manage your loan.
Borrowers with Direct Subsidized Loans are typically eligible to enroll in the following repayment plans:
- Standard Repayment Plan
- Graduate Repayment Plan
- Extended Repayment Plan
- Revised Pay As You Earn Repayment Plan (REPAYE)
- Pay As You Earn Repayment Plan (PAYE)
- Income-Based Repayment Plan (IBR)
- Income-Contingent Repayment Plan (ICR)
- Income-Sensitive Repayment Plan
If you would like to change the repayment plan on your Direct Subsidized Loan, simply contact your loan servicer.
Direct Subsidized Loan Refinancing and Consolidation
There is no federal student loan refinancing program. In order to refinance your Direct Subsidized Loan, you would need to turn to a private lender who would essentially convert your loan into a private loan. While this may bring benefits such as a lower interest rate or lower monthly payments, it also means that you will be losing certain benefits carried by federal loans, such as the ability to place your loans in deferment or forbearance. Because Direct Subsidized Loans do not accrue interest during deferment, borrowers should think carefully before deciding to refinance them. Therefore, it’s important to weigh the pros and cons of refinancing before you make a decision.
Student loan consolidation is a process in which you combine multiple federal student loans into a single new loan, called a Direct Consolidation Loan. This new loan’s balance will be the total of all of its component loans, added up. The interest rate that it carries will be the weighted average of all of the loans that make it up.
Direct Subsidized Loans can be consolidated under this program.
Direct Subsidized Loan History
The Higher Education Act of 1965 created the Federal Guaranteed Student Loan program, which made federally-backed student loans available to college students. This program was renamed the Robert T. Stafford Student Loan Program in 1988, and the loans offered through the program became commonly referred to as Stafford Loans. Direct Subsidized Loans are managed by this program.
Alternatives to Direct Subsidized Loans
If you do not qualify for Direct Subsidized Loans, you do still have other options at your disposal. Direct Unsubsidized Loans, for example, are available to all borrowers, regardless of financial need. Additionally, if Direct Unsubsidized Loans do not cover the total cost of tuition, you may be able to borrow private student loans, though these will typically be more expensive.
The parents of dependent undergraduate students may qualify to borrow Direct Parent PLUS Loans to cover any gaps that still exist.