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A subsidized loan is a loan on which the interest is reduced by an explicit or implicit subsidy. The subsidy may be a part of the interest rate, or it may be in the form of a lower interest rate.
What is a Subsidized Loan?
A subsidized loan is a loan for which the lender is compensated by the government for part of the loan’s loss. This type of loan is given to borrowers who, according to the government, would have difficulty obtaining loans without the subsidy. The subsidy reduces the cost of borrowing for the borrower and, in some cases, may also result in a lower interest rate.
How do Subsidized Loans Work?
Subsidized loans are need-based loans that are available to undergraduate and some graduate students. The U.S. Department of Education pays the interest on these loans while you’re in school, during your grace period, and during any deferment periods.
To be eligible for a subsidized loan, you must demonstrate financial need by completing the Free Application for Federal Student Aid (FAFSA®). If you’re eligible for a subsidized loan, the government pays the interest while you’re in school, during your six-month grace period, and during any deferment periods.
Who is Eligible for a Subsidized Loan?
Eligibility for a subsidized loan is based on financial need. To be eligible, you must:
-Be enrolled at least half-time in an eligible degree or certificate program at a school that participates in the Direct Loan Program
-Not have exceeded your loan limit for the program
-Meet other eligibility criteria set by the Department of Education
How to Apply for a Subsidized Loan
To apply for a subsidized loan, you will need to fill out a Free Application for Federal Student Aid (FAFSA) form. This form can be found on the website of the Department of Education. The FAFSA form is used to determine your financial need and eligibility for federal student aid.
If you are eligible for a subsidized loan, your school’s financial aid office will notify you. You will then need to complete a Master Promissory Note (MPN). An MPN is a legal document in which you promise to repay your loan.
You will have to sign the MPN before you can receive your loan money. Once you have signed the MPN, you will not have to sign another one for future subsidized loans that you may receive.
Repaying a Subsidized Loan
If you have a subsidized loan, the federal government pays the interest while you’re in college and during your grace period. You’re not responsible for any loan payments until after you graduate or drop below half-time enrollment, and then you have a six-month grace period before you must begin repaying your loan.
The repayment period for a subsidized loan (like all federal student loans) is up to 10 years. You can prepay your loan at any time without penalty.