A subsidized loan is made more affordable for borrowers who qualify based on need. The lender, in this case the U.S. Department of Education, agrees to take a lower profit off the loan in order to help a borrower who does not have a large ability to pay attend college. The loan may have suspensions of interest rates or payments for a period of time in order to make college affordable.
A subsidized loan is designed to not only help a student pay for college, but also to make the cost of the loan very inexpensive. The loan is issued on a term-by-term basis in the amount of tuition required. The U.S. Department of Education pays the college directly. The borrower, in this case the student, does not need to make payments on the debt until after he graduates from college. Only after graduation will the payment begin, and in some cases, interest will not even accrue in the meantime.
Only certain types of Federal Family Education Loans may be subsidized. These include direct loans given through the Perkins or Stafford Program. PLUS loans, which are issued in the name of a parent while a student attends college, do not have a subsidized option. Consolidation loans may not be subsidized either.
To qualify for a subsidized Stafford or Perkins loan, a student must first meet credit requirements. The Department of Education is understanding with certain credit challenges facing young people, such as a short credit history. However, a student who has defaulted on loans in the past or is delinquent on certain federal debts will not qualify for a student loan through the department. Once a student qualifies for a loan, the student may apply for a subsidy on the loan. This is issued solely based on need. The lower a student's income and the less help he receives in payment, the more likely the student will receive the subsidy.
The main benefit of a subsidy on a student loan is a reduction in the actual cost of attending school while you are still in college. With a subsidized loan, you do not have to worry about making payments while you are a full-time student. Many loans will allow you to defer payment until after graduation, but they will charge you interest during the deferment period. Subsidized federal loans do not charge interest during a deferment period. This means your loan will be no more expensive if you wait to make payments until graduation.
Even if you do not qualify for a subsidy, you may still look to receive unsubsidized federal student loans. These loans will have payments and interest while you attend school. However, the overall cost of a federal education loan will typically still be less than a private loan, even for students without a loan subsidy.