The Federal Direct Stafford loan is of two types, subsidized and unsubsidized.
The federal government pays interest on subsidized loans during school and grace periods, as well as authorized deferment periods. Eligibility for subsidized loans is based on financial need.
Other loans, such as the Parent PLUS Loan, Grad PLUS Loan, and Private Student Loans, are not subsidized.
In 2019-2020, a total of $ 18.5 billion in subsidized Stafford loans were made to 4.9 million undergraduates. $ 19.9 billion in unsubsidized Stafford loans went to 5.0 million undergraduates and $ 26.1 billion in unsubsidized Stafford loans went to 1.4 million graduate students. 425,000 graduate students received $ 10.7 billion in Grad PLUS loans and 754,000 parents received $ 12.3 billion in Parent PLUS loans.
What is the practical difference between subsidized and unsubsidized student loans?
Benefits of subsidized interest
The federal government pays interest on subsidized loans during the school period, when the borrower is enrolled at least part-time, and during the six-month grace period after the borrower graduates or falls into retirement. below the half-time registration.
There is one exception, which concerns soft loans made in 2012-13 and 2013-14, when Congress eliminated the subsidized interest benefit during the grace period on loans in those years.
The federal government also pays interest on subsidized loans during periods of authorized deferment, such as deferment of economic hardship, deferment of unemployment, and military deferment. The subsidized interest benefits also apply to periods of subsequent college enrollment at least part-time, such as for graduate studies.
The subsidized interest benefit only applies to subsidized loans and only during school, pardon and deferment periods. It does not apply to unsubsidized loans, nor during periods of forbearance.
The federal government does not pay interest on subsidized loans during forbearance periods and on unsubsidized loans during deferment and forbearance periods.
Any accrued but unpaid interest will be added to the loan balance (capitalized) at the end of the deferment or forbearance period.
There is a special deferral for active cancer treatment during which the federal government pays interest on subsidized and unsubsidized loans.
The federal government pays accrued but unpaid interest on subsidized loans during the first three years of the IBR, PAYE, and REPAYE income-based repayment plans. The federal government also pays half of the accrued but unpaid interest on unsubsidized loans in the first three years under REPAYMENT, and on subsidized and unsubsidized loans after the first three years under REPAYMENT.
As of 2013-2014, the interest rates on subsidized and unsubsidized Federal Direct Stafford loans have been the same.
Annual loan limits
Loan limits on Federal Direct Stafford loans depend on loan type, school year, degree level, borrower dependency status, and loan type.
The loan limits for subsidized loans for undergraduates are $ 3,500 for freshmen, $ 4,500 for sophomores, $ 5,500 for juniors and $ 5,500 for seniors . These loan limits are the same for dependent and independent students.
Subsidized Stafford loans are also capped based on the student’s financial need if they are below annual limits.
The loan limits for unsubsidized Federal Direct Stafford loans are more complicated. There are higher overall limits for Federal Direct Stafford loans. Students can borrow any amount not received in the form of subsidized loans as unsubsidized loans.
- The overall limits for Federal Direct Stafford loans for dependent students are $ 5,500 for freshmen, $ 6,500 for sophomores, $ 7,500 for juniors, and $ 7,500 for seniors.
- The overall Federal Direct Stafford loan limits for independent students are $ 9,500 for freshmen, $ 10,500 for sophomores, $ 12,500 for juniors, and $ 12,500 for seniors.
- If a dependent student’s parent is denied a Federal Direct Parent PLUS loan, the student becomes eligible for the higher overall Stafford loan limits available to independent students.
Graduate and vocational school students can borrow up to $ 20,500 in unsubsidized loans each year ($ 40,500 for medical students). Graduate students are no longer eligible for subsidized loans since 2012.
Global loan limits
The overall loan limits for the Stafford Subsidized Loans are $ 23,000 for dependent and independent undergraduates. The overall overall loan limit is $ 31,000 for dependent students and $ 57,500 for independent students.
The sum of the first four years of the annual loan cap is $ 19,000 for subsidized loans. The sum of the first four years of the overall Stafford loan limit is $ 27,000 for dependent students and $ 46,000 for independent students. Thus, to reach the overall limits, one must borrow for at least five years.
The overall loan limits are $ 138,500 for graduate and vocational schools, including undergraduate loans, and $ 224,000 for medical schools.
Who is eligible for a subsidized loan?
Only undergraduates are eligible for direct federal loans subsidized by Stafford. Graduate students are no longer eligible since 2012.
Eligibility is also based on financial need. The student must file a FAFSA each year to determine if they demonstrate financial need each year. The college financial aid administrator will determine the student’s eligibility for Stafford subsidized loans and the amount of loans available based on their financial need.
As of July 1, 2013, eligibility for Stafford’s subsidized loans is also subject to the Subsidized Usage Limit (SULA) application, an obscure set of complicated rules. SULA sets a maximum eligibility period equal to 150% of the normal duration of the program, but only counts the years in which the student received a subsidized loan. Once the student has reached the SULA limit, they can no longer obtain subsidized loans unless they upgrade to a longer program and the subsidized loans are no longer subsidized.
SULA was repealed effective July 1, 2023, but the US Department of Education may choose to make the repeal effective sooner.
Even with the repeal of SULA, federal student aid is subject to an overall limit of 150%. This causes a student in a 4-year bachelor’s degree program to lose their eligibility for higher federal financial aid if they don’t graduate in six years.
Are Subsidized Loans Better Than Unsubsidized Loans?
Subsidized loans are clearly better than unsubsidized loans because they have a lower cost.
Assuming an undergraduate student receives the maximum subsidized Stafford loan amount each year for four years, the total interest paid over a 10-year repayment period is about a third less than the total interest on a loan. not subsidized.
The subsidized interest benefit gives the equivalent of an unsubsidized loan at half the interest rate, assuming a repayment term of 10 years.
Thus, when a borrower tries to speed up the repayment of his loans, he must first target unsubsidized loans for faster repayment, before any subsidized loan.
Common misconceptions about subsidized loans
There are a few common mistakes people make when discussing subsidized versus unsubsidized loans.
- Some people have wrongly said that the federal government pays interest on subsidized loans during deferrals and forbearances. The federal government only pays interest on subsidized loans during a deferral and not during a forbearance. The federal government does not pay interest on unsubsidized loans during a deferral or forbearance.
- Some people say that interest doesn’t accrue on a subsidized loan during a deferral. This is not technically correct. Interest accumulates, but is paid by the federal government.
- Sometimes there is confusion about subsidized loans and the interest deduction on student loans. Borrowers can claim the interest deduction on student loans based on the interest they paid on a subsidized loan, not the interest paid by the federal government. Thus, when a subsidized loan is in repayment and not deferred, the interest accrues and, if paid by the borrower, will be eligible for the student loan interest deduction, assuming the borrower satisfies other requirements (p.