A direct subsidized loan is the best type of student loan you can get

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The total lifetime amount an undergraduate student can borrow in direct subsidized loans is $US23,000. Samuel Borges Photography/Shutterstock
  • A direct subsidized loan is a government-backed student loan that does not accrue interest until six months after the borrower graduates.
  • Also known as a subsidized Stafford Loan, it is only awarded to undergraduate students who demonstrate serious financial need, as determined by the FAFSA.
  • For direct subsidized loans taken out between July 1, 2019, and June 30, 2020, the interest rate is fixed at 4.53%.
  • The total lifetime amount an undergraduate student can borrow in direct subsidized loans is $US23,000.
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Americans may collectively owe about $US1.6 trillion in student debt, but not every loan is created equal.

Federal student loans, which are backed by the US government, almost always come with more favourable terms than private loans backed by financial institutions, state agencies, and other lenders.

Unlike a private loan, students don’t need credit history or a co-signer to take on a federal loan, and they often have access to flexible repayment plans and loan forgiveness. Plus, interest rates are fixed and usually lower than that of a private loan.

But one of the biggest advantages some federal loans have over private loans is how interest accrues. A direct subsidized loan, also known as a federal subsidized Stafford Loan, is one of the best options for borrowing money for college, but it’s not available to everyone.

What is a direct subsidized loan?

Federal student loans generally come in two varieties: subsidized and unsubsidized.

A direct subsidized loan – “direct” means government-funded – is the most cost-effective loan for almost any undergraduate student who needs to borrow money for tuition and other school-related costs.

With a direct subsidized loan, interest doesn’t accrue for the borrower while they’re enrolled at least part-time in an undergraduate degree program and during the six months after graduation. Interest begins accruing on the principal balance of the loan after that grace period, at which point the student is required to begin making payments, unless they receive a deferment.

A direct unsubsidized loan, by contrast, accrues interest throughout the life of the loan and the borrower is responsible for repayment of the interest and principal. Depending on how much you borrowed, interest can add hundreds, if not thousands, of dollars to the total repayment amount.

Direct subsidized loans are only offered based on the financial need of a student or their family and are therefore the most difficult type of loan to qualify for. To find out whether you’re eligible for a direct subsidized loan, or any other type of financial aid, you have to fill out the Free Application for Federal Student Aid (FAFSA), which uses income and asset information to determine how much you and your family can afford to contribute to college.

Interest rates for subsidized and unsubsidized federal loans are the same and remain fixed for the life of the loan. For undergraduate loans taken out betweenJuly 1, 2019 and June 30, 2020, the interest rate is 4.53%, and for graduate loans the interest rate is 6.08%.

The total lifetime maximum amount of federal loans a dependent undergraduate student can take on is $US31,000, but no more than $US23,000 can be subsidized. The maximum amount an independent undergrad can take on is $US57,500, with the same $US23,000 cap on subsidized loans.