Subsidized Loan

A subsidized loan is an incentive offered to students. The federal government pays the accrued interest for a duration. Beyond that, the borrower is responsible for repaying. These loans are typically associated with undergraduate students. They are also known as Stafford loans.

Similarly, the government also offers subsidized home loans. But not all loans are subsidized. Therefore, debt is classified into subsidized and unsubsidized loans. Loan subsidies are only available for students who face financial constraints. Students who are not eligible for loan subsidies can apply for unsubsidized federal loans.

• Subsidized loans are federal education loans offered to undergraduate students in which the government pays for the interest during the education period.
• The student submits a FAFSA form. The loan application is reviewed, and the student receives an award letter from the school's office if sanctioned.
• After graduating, the student receives a six-month grace period from the government. Beyond that, students have to repay the loan principal and periodic interest.
• Subsidies increase consumers’ purchasing power directly. This increases consumption and boosts the economy. Therefore, education becomes accessible to more students.

Subsidized loans are loans offered by the US federal government. The US offers incentives, especially to American students who apply for a college degree. When a student applies for college, they receive a loan subsidy immediately. The student continues their education, and the US Department of Education takes care of the accrued interest (on loans) throughout the course.

But, once the student graduates, they are left with a mere six-month grace period. Beyond that, students are on their own. They have to repay the remaining loan principal and periodic interest.

Before venturing further, let us quickly define a subsidy. A subsidy in economics refers to direct or indirect financial assistance from the government to an individual, household, business, or institution. By design, subsidies promote social and economic welfare. Its goal is to lower the cost of producing goods, commodities, or services. They make a product or service more affordable to the general population.

The government provides subsidies in cash, grants, interest-free loans (direct), tax exemptions, and low-interest loans (indirect). Usually, fuel, agriculture, export, transportation, education, housing, mining, and research are granted subsidies.

In a way, the government uses subsidies to control market demand and consumption. Subsidies increase consumers’ purchasing power directly. In turn, they purchase more. Increased consumption can potentially boost manufacturers and financial markets.

There are multiple repayment options available for a student to choose from. Some loans come with a predetermined repayment plan. To change repayment plans, students must contact the loan provider. Many economists believe loan subsidies give students a head start to maintain healthy credit histories.

Let us look at subsidized loan qualifications.

The US government mandates a specific procedure to acquire a loan subsidy. The student must meet the following criteria:

• The student must be an American citizen, national or permanent US resident.
• The student must be enrolled in a school for at least half the time.
• The student must have a clear record of past loan payments; students with a record of loan defaults are not eligible.
• The student must possess good academic background and standing.
• The borrower must furnish details to prove financial constraints within the family.

The student and their family submit a FAFSA form. The loan subsidy application is reviewed, and the student receives an award letter from the school's office if sanctioned. Typically, this procedure is handled by the school’s financial aid department.

This letter will contain all the information, including the amount (aid). The student must sign a promissory note in response to the award letter. By signing the promissory note, the student agrees to the loan terms and conditions—it is a formal document.

For queries, students and their families can get an appointment for free online counseling. The online session elaborates on borrowers’ obligations, responsibilities, and loan details. The funds remain with the college. The college uses the fund to cover the student’s fees, tuition, accommodation, and miscellaneous charges.

Let us look at subsidized loan examples to understand this incentive structure.

Example #1

Kate wants to acquire a degree course from a college. She applies to various colleges. She collects a catalog detailing the cost of education at each institution. Kate saved up for college but realizes she is still short of $9000.

Kate applies for a year-based direct subsidized loan of $9000 for the whole college term (four years). The loan term is 9 years. After graduation, Kate still has 5 more years to complete repayment.

Kate starts attending college, and her lender, the US Department of Education, covers the interest for the next four years. The loan comes with a grace period of nine months. Once Kate graduates, the government will cover her interests for nine more months. But beyond that, she is on her own. She is expected to repay the entire installment.

After four years, Kate graduates. She is left with a loan principal of $9000. Along with the principal, Kate starts paying interest in her monthly installments.

Example #2

Most students are unaware that there is a maximum time limit. Beyond the cap, students cannot secure subsidies for loans. A student can only cover up to 150% of the program length. It is also denoted as the maximum eligibility period.

Also, the subsidy is curtailed if a student relegates from being a full-time student to a part-time student. The crucial details are mentioned in the agreement drafted by the Department of Education.

Now let us look at subsidized loans' advantages and disadvantages.

• They help students participate in higher education programs.
• Students save a lot of money; the government pays interest payments.
• Compared to private educational loans, subsidized loans offer lower interest rates.
• These loans offer flexible repayment options; there are multiple repayment plans.
• Students acquire a subsidy from the government at a point when earning is difficult. After graduation, students are exposed to better income-generation opportunities.

The disadvantages are as follows:

• There is a set limit to which a student can borrow. The loan amount does not cover the cost of the entire course.
• Subsidies are only available for undergraduate students.
• The financial needs clause must be enforced strictly. The government should not end up spending tax dollars on educating wards of affluent parents.

• Subsidized loans are only for undergraduate students. Unsubsidized loans can be acquired by both graduate and undergraduate students.
• They are based on the student's financial needs. These caveats do not apply to unsubsidized loans.
• Subsidized loans are cheaper than unsubsidized loans; for a duration, the student does not pay accrued interest.
• The US government pays accrued interest in subsidized loans until the student graduates. In contrast. Unsubsidized loans require students to repay accrued interest immediately (periodic installments). Also, if a student fails to pay interest, it gets added to the loan principal. The bloated loan principal results in a considerably higher interest thereon.

This article has been a guide to what is a Subsidized Loan. We explain its qualifications, examples, advantages, disadvantages & comparison with an unsubsidized loan. You can learn more about it from the following articles -

• Forbearance vs Deferment
• Direct PLUS Loan
• Social Capital