Understanding Direct Student Loans - Sub vs Unsub
The federal government offers the single largest federal financing for undergraduate students most often referred to as "Direct Loans.” The College Board Trends in Student Aid estimates that undergraduate students borrowed $34.7 billion in these loans in 2020-21. Since so many students are using these loans, it’s important to really understand the basics.
The Basics
Students who apply for the Free Application for Federal Student Aid (FAFSA) may be eligible for low cost loans if they are enrolled at least half-time. The feds have annual loan limits based on the year in college. Although these limits occur, some students may be eligible for less based on other financial aid received and the cost of attendance while enrolled. The college will inform you of how much Federal Direct Student Loans that each student is eligible to receive.
The interest rate on Federal Direct Loans is a fixed rate set annually based on 10-year Treasury note plus 2.05%. Federal law created caps on these annual rates at 8.25%. For loans disbursed on or after July 1, 2021, and before July 1, 2022, the Direct Student Loan interest rate is 3.73%. Interest accrues from the point of disbursement. No payment is required as long as the student is enrolled at least half-time or in a qualifying grace period, deferment, or forbearance.
Typically, a borrower only gets one 6-month grace period per federal loan. Borrowers who graduate or cease to be enrolled at least half-time enrollment will begin repayment on the loan.
Federal Direct Student Loans are eligible for deferment. That is a period of time when you are not required to repayment interest or principal These include
- enrolled at least half-time
- in the six-month grace period after they graduate or cease to be enrolled for at least half-time (only eligible once per loan)
- enrolled in a approved disability rehabilitation training program
- serving in the Peace Corps for you to three years
- unemployed for up to three years
- experiencing demonstrated economic hardship for up to three years
- * active duty military service in connection with a national emergency, military operation, or war
- in a 13-month period following the conclusion of their active duty military service in connection with a national emergency, military operation, or war or or re-enroll at least a half-time basis, whichever is earlier
Federal Direct Student Loans are eligible for forbearance, a period of time that no repayment of interest or principal is required. Typically such forbearances are granted for no more than 12 months at a time but may last up to 3 or more years in some categories. Interest continues to accrue during forbearance. If the interest is not paid, then the amount will be capitalized once the loan enters into repayment again.
General forbearance is offered to borrowers experiencing hardship like financial difficulties, medical expenses, change in employment, and other reasons deemed acceptable by the federal loan services. However, there is a cumulative limit on general forbearances of three years. There are also mandatory forbearance periods for borrowers who serve in AmeriCorps, who qualify for partial repayment of your loans under the U.S. Department of Defense Student Loan Repayment Program, who serve in a medical or dental internship or residency program, who serve as amember of the National Guard and have been activated by a governor (but you are not eligible for a military deferment), or who owe 20% or more of your total monthly gross income in federal student loans.
The federal government does limit the amount of Federal Direct Student Loan an undergraduate can borrow both annually and aggregately - that is over the life of their education.
What’s the Difference Between Subsidized and Unsubsidized?
Federal Direct Student Loans come in two forms - Federal Direct Student Subsidized Loans and Federal Direct Student Unsubsidized Loans. In short, Federal Direct Student Subsidized Loans are slightly better. In the first year, a dependent student can borrow up to $3,500 in subsidized funds if they show financial need. In the second year, the borrower can have up to $4,500 in subsidized funds. For third undergraduates and beyond, the cap of subsidized loan funds is $5,500. The feds pay the interest on subsidized loans on behalf of borrowers as long as they are enrolled at least half-time or are in their grace period.
No payment is required as long as the student is enrolled at least half-time or in their grace period. Any unpaid interest is capitalized once prior to entering repayment. In the first year, a dependent student can borrow up to $5,500 minus any Direct Subsidized Loan funds. In the second year, the dependent borrower can have up to $6,500 minus any Direct Subsidized Loan funds. For third-year undergraduates and beyond who are dependent, the cap of subsidized loan funds is $7,500 minus any Direct Subsidized Loan funds. If a student is considered independent based on the US Department of Education definitions, then they can borrow up to an additional $4,000 in unsubsidized loans annually as undergraduates.
On Federal Direct Subsidized Loans, interest will be paid on behalf of the borrower by the federal government when the borrower is granted a deferment or forbearance. For unsubsidized loans, interest continues to accrue and is capitalized once prior to entering back into repayment.
Rose By Another Name May Still be Federal Direct Student Loans
In a
study conducted by New America and UAspire, colleges had 136 easy to list the Federal Direct Student Unsubsidized Loan. So be prepared to get a college financial aid offers may call these loans one of the following (or some combination of:
- Federal Direct Student Loan
- Direct Student Loan
- Sub Loan
- Unsub Loan
- Subsidized Loan
- Unsubsidized Loan
- Subsidized Stafford Loan (sort of prior name of this loan program)
- Unsubsidized Stafford Loan
If your college didn’t specify whether the Federal Direct Student Loan was subsidized or unsubsidized, make certain you reach out to clarify.
Gauging Your Direct Student Loan Repayment
To better understand the monthly payment of your Federal Direct Student Loans, consider using our
College Finance Planner. After selecting your college price (calculating using our easy tool or entering your own), you can answer a few questions to see how much the monthly payment of your Federal Direct Student Loan will be for your entire degree based on the most recent interest rate. Plus, if the Federal Direct Student Loan annual limit does not cover all your financing needs, you can compare your eligible financing options side-by-side to fill in the rest of the funding gap. Seeing all of your detailed financing options side-by-side in one place helps you find the best financing based on your unique financial needs.
Colleen Krumwiede
Co-Founder & Chief Marketing Officer
Colleen MacDonald Krumwiede is a financial aid and paying for college expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Quatromoney to transform the way families afford college.
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