Subsidized Student Loans

By: EconomyWatch Content   Date: 1 December 2009

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Subsidized student loans are lending instruments that are backed by the US federal government. The interest charged under such loan programs are subsidized, which implies that the interest does not accrue until the payment becomes due. Borrowers of subsidized education loans are not liable for interest payments during their college term, the burden of which is borne by the federal government. Besides, borrowers are also freed from their interest payment obligations for a specific grace period after graduation, which is typically six months. 

Subsidized Student Loans: Eligibility and Application

The federal government has established certain basic criteria to qualify for a subsidized student loan, which states that an applicant must be:

  • A US citizen or an eligible non-citizen

  • Enrolled, full-time or part-time, in an accredited learning program

  • In possession of GED (General Education Development) or a high school diploma

Additionally, an applicant must appropriately complete the federal loan paperwork to obtain a subsidized student loan. Free Application for Federal Student Aid (FAFSA) is a standard application form used to determine the eligibility of students for a federal unsubsidized loan. The form seeks to verify an applicant’s income and ETC (Expected Family Contribution). Since subsidized student loans are intended for financially weak students, applicants with a moderate or high ETC are rejected for such loans. 

Subsidized Student Loans versus Unsubsidized Student Loans

Both subsidized and unsubsidized student loans are important sources of financing higher education. While subsidized student loans are offered exclusively by the federal government, unsubsidized loans may be obtained from private lenders as well. Other important distinctions between the two sources of education funding are:

·        Approval: Unsubsidized student loans require submission of a credit check, and individuals with a poor credit history fail to qualify for these loans. Conversely, subsidized student loans are offered to financially weak students, generally on the basis of their grades and extra-curricular participation.

·        Interest rate: Subsidized student loan programs accompany fixed interest rates, which tend to be lower than that of unsubsidized loan programs. Also, the interest rate on an unsubsidized loan is determined according to a borrower’s credit rating. Therefore, students with poor credit histories may have to agree to even higher interest rates.

·        Loan limits: Subsidized student loan programs have lower loan limits per semester, whereas an unsubsidized student loan borrower can obtain a higher loan amount.

Since loans are disbursed on a semester-basis, ineffective planning may lead to shortage of funds. In such circumstances, a borrower may have to apply for both unsubsidized and subsidized student loans to cover college expenses more effectively.


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