Subsidized Student Loans
Financing a college education is a serious financial challenge for many families. Few can afford to cover the entire cost of college out of pocket, and the available funding options can seem intimidating and at times impossible to manage. With a variety of student loans, some private, some from the federal government, and even more from state governments and some from colleges themselves, it’s hard to keep track and understand what the best financial options are.
Fortunately, there is one loan option that stands out above the rest as a clear best bet, once a student and his or her family has determined that they must borrow to cover college costs: and that option is a subsidized student loan.
It pays to know a bit about what subsidized student loans are, and where they come from, so here are the highlights. The federal government – specifically the Department of Education – disburses and administers subsidized student loans. Congress sets the interest rates, and those are determined in federal legislation. Currently, the interest rates are set to the ten-year Treasury note, a low-risk note issued by the United States Treasury and backed by the government.
The government covers the interest that accrues on these loans while a student is in school, enrolled at least on a half-time basis, and for several months after a student graduates or drops below half-time status: and this is what makes them subsidized loans. The student is expected to pay back the loan, of course, but that student isn’t continuing to rack up interest while obtaining an education.
There are two types of subsidized student loans: Direct loans and Perkins loans. They each have their own requirements, but they both begin with the Free Application for Federal Student Aid (FAFSA). Students who fill out this form are automatically checked for eligibility in subsidized programs, and if they qualify, they’re provided with instructions about enrollment. Students can study those offers and either accept or deny the help with no penalty involved. For any student facing college payment difficulties, the FAFSA is a good place to start, but learning more about how the loans work will help the student prepare to accept or reject the help that’s provided.
The Direct loan system is a little confusing, as some of these loans are subsidized and others are not, but loans in this category are also quite common.
- Half- or full-time enrollment in a participating school
- Proof of enrollment in a school that offers a degree or certificate
- Demonstrated financial need
Most of the requirements are covered in the FAFSA, and it’s important for students to be honest in their enrollment paperwork, as the officials do check each point provided and ensure that it’s accurate.
The financial need component of the picture is vital, as these loans are designed to go to students with demonstrated financial need. USA Today reports, for example, that two-thirds of these loans go to families with adjusted gross incomes totaling less than $50,000.
Those students who do qualify can see a deep discount on the interest rate they’re asked to pay. In the 2016-2017 school year, for example, the interest rates for these loans for undergraduates stood at just 3.76%. That rate may rise or lower in the coming years, as the rates are set by Congress. However, these loans do come with a loan fee. That fee is quite small, but it should be taken into account by students who take out a loan.
The Perkins loan program is much smaller than the Direct loan program, and is designed to assist students from notably low-income families. These loans are also processed through the schools the students attend, not individual loan providers, and not all schools participate in the Perkins program. The U.S. Department of Education indicates that about 1,700 institutions participate, but that leaves many more that do not.
Eligibility for this program is once again determined by the answers a student provides on a FAFSA, and the student is provided with enrollment paperwork if the proper need can be demonstrated and supported. Those who can obtain a loan like this often see remarkably low interest rates that stay steady for the life of the loan, with no interest accruing during the time the student spends in school. These loans also don’t come with additional fees.
Benefits of Subsidized Loans
It’s easy to see how obtaining a subsidized loan might help a family to save money. Since interest doesn’t accrue while the student is in school, the student enjoys an effective zero percent interest rate for several years. That’s a wonderful benefit. In addition, as mentioned, these loans often have interest rates that are much lower than a private student loan.
Many subsidized loans also come with a few guarantees about costs. The latest Congressional agreement, reached in the summer of 2013, ensures that the rate a student agrees to at the beginning of the loan period stays in place for the life of the loan, according to an analysis performed by U.S. News and World Report. Private loans can often come with variable interest rates that can fluctuate over the repayment period. Most subsidized loans are far more stable.
Subsidized loans can be of benefit to students, but there are some things to watch for. There are limits on the amounts that students can borrow, for example, and those limits might seem quite low to some students. First year undergraduates may only be allowed to borrow a portion of the money they’ll need to meet their financial obligations, for example, meaning that they might need to get another loan or attend a different school. There are caps on how much a student can borrow too, so students who spend many years in school may see that they bump up against limits that keep them from getting the financial aid they need in order to stay in school. All of these limits are outlined on the Federal Student Aid website, and they’re worth a close look.
- Switch from one degree program to another that runs for a shorter period of time
- Drop out altogether
- Switch from a participating school to one that doesn’t participate in the loan program
- Move from half-time to quarter-time enrollment
These decisions might seem applicable only to the student in question, impacting that student’s ability to graduate in a timely manner. But some of these decisions can trigger adverse events, like cancellation of the loan, or repayment of the interest that the school or the government once paid. Any kind of decision about schooling should be made quite carefully, when a subsidized loan is in play.
Filling out the FAFSA is the best way to get started on the subsidized student loan process. The form can be tedious and time-consuming, so it’s best for students to set aside a few hours of number crunching and calculating. Once that form is filled out, students need only wait for a response. If the student qualifies for aid, that student is typically required to complete a form of counseling that describes how the loan works. Once this counseling is complete, the student will have a clear understanding of the fact that the loan must be repaid, and that student will likely be asked to sign a promissory note that will work as a formal acceptance of that plan. The rules and regulations can vary a bit from school to school, but this is the general path students take when they’re enrolled in a subsidized loan program.
This all sounds straightforward, but not all students who petition will be approved for this program. Since the requirements are so stringent and competition for these loans can be fierce, it’s a good idea for students to examine their other payment options as they wait for a response to the FAFSA. Looking in the private sector, applying for scholarships, and otherwise doing fundraising could help a student to prepare, just in case the application doesn’t go in the way the student hopes.