Can You Get Subsidized Loans for Grad School?

Financing graduate education often involves exploring various student loan options. A subsidized loan is a specific type of federal student aid where the government pays the interest that accrues while the borrower is enrolled in school at least half-time, during the grace period after leaving school, or during periods of deferment. This feature can significantly reduce the total cost of borrowing. However, prospective graduate students should understand that subsidized loans are generally not available for graduate or professional studies.

Federal Loan Eligibility for Graduate Students

Direct Subsidized Loans are exclusively reserved for undergraduate students who demonstrate financial need. Graduate or professional students are not eligible to receive these loans. This means interest starts accruing immediately on federal loans available to graduate students. Despite this, federal loan programs offer two primary options for graduate-level studies.

Direct Unsubsidized Loans are available to both undergraduate and graduate or professional students, regardless of financial need. For graduate students, the annual borrowing limit for Direct Unsubsidized Loans is $20,500. The aggregate, or lifetime, limit for these loans, including any federal loans received for undergraduate study, is $138,500. Interest begins to accrue on these loans from the moment they are disbursed.

Another option is the Direct PLUS Loan, specifically the Grad PLUS Loan for graduate and professional students. These loans can cover up to the full cost of attendance at the educational institution, minus any other financial aid received. Grad PLUS Loans are credit-based, meaning eligibility depends on the borrower not having an adverse credit history. Interest accrues on Grad PLUS Loans from the time of disbursement.

To qualify for any federal student aid, including these graduate-level loans, applicants must meet general eligibility requirements. These include being a U.S. citizen or eligible non-citizen, possessing a valid Social Security number, and being enrolled at least half-time in an eligible degree or certificate program. Borrowers must also not be in default on any federal student loans or owe a refund on a federal grant.

Understanding Loan Types and Interest

The key distinction between subsidized and unsubsidized federal loans lies in how interest accrues and who is responsible for paying it. For Direct Subsidized Loans, the U.S. Department of Education covers the interest while the student is in school at least half-time, during the grace period, and during deferment periods. This benefit significantly reduces the overall cost of the loan for undergraduate borrowers. In contrast, for Direct Unsubsidized Loans and Grad PLUS Loans, the borrower is responsible for all interest that accrues from the time the loan is disbursed.

Interest on federal student loans begins accumulating daily from the disbursement date. If this accrued interest is not paid while the student is in school, during the grace period, or during periods of deferment or forbearance, it can be added to the loan’s principal balance in a process known as capitalization. When interest capitalizes, the total amount owed increases, and future interest is then calculated on this new, higher principal balance, leading to a larger total repayment amount over the life of the loan. For example, if $340 in interest accrues on a loan and capitalizes, the principal balance increases, and future interest is charged on this higher amount.

Federal student loan interest rates are fixed for the life of the loan, meaning the rate set at the time of disbursement will not change. These rates are determined by federal law each spring for loans disbursed in the upcoming award year.

Applying for Federal Student Aid

The Free Application for Federal Student Aid (FAFSA) is the essential form for graduate students to apply for federal student loans. Completing the FAFSA determines eligibility for all federal student aid programs. This application collects financial and demographic information to assess a student’s aid eligibility.

Before starting the FAFSA, gather necessary documents, including the student’s Federal Student Aid (FSA) ID, Social Security Number, and tax returns. Records of untaxed income and asset information are also required. Providing consent to retrieve federal tax information directly can expedite processing.

The FAFSA is submitted online, and the information provided is then used by the school’s financial aid office. This office determines the student’s eligibility and constructs an aid package, which may include federal loans. After being offered federal loans, borrowers must complete two additional steps: the Master Promissory Note (MPN) and Entrance Counseling.

The Master Promissory Note is a legal document where the borrower promises to repay the loan and agrees to its terms and conditions. This single MPN can often cover multiple federal loans received over a period of up to 10 years. Entrance Counseling is a mandatory online session ensuring borrowers understand topics such as interest accrual, repayment options, and the consequences of not repaying. Loans cannot be disbursed until both the MPN is signed and Entrance Counseling is completed.

Managing Your Federal Student Loans

After federal student loans are disbursed, a loan servicer is assigned to manage the account. A loan servicer is a company contracted by the U.S. Department of Education to handle billing, process payments, and assist borrowers with repayment options. Borrowers should identify their servicer and keep their contact information updated.

Most federal student loans, including Direct Unsubsidized Loans, have a grace period, typically six months, after a student graduates, leaves school, or drops below half-time enrollment before repayment begins. While Direct PLUS Loans do not have a traditional grace period, graduate and professional students with these loans usually receive an automatic six-month deferment that functions similarly. During this grace or deferment period, interest continues to accrue on unsubsidized and PLUS loans.

Several repayment plans are available for federal student loans. The Standard Repayment Plan typically involves fixed monthly payments over a 10-year period. Other options include Graduated Repayment, where payments start low and increase over time, and Income-Driven Repayment (IDR) plans. IDR plans, such as Income-Based Repayment (IBR) and Saving on a Valuable Education (SAVE), adjust monthly payments based on the borrower’s income and family size, potentially leading to payments as low as $0 per month. These plans can be especially helpful for graduate students who may have lower incomes immediately after graduation.

Paying the accrued interest on unsubsidized and PLUS loans while still in school or during the grace period can prevent it from capitalizing. This proactive approach ensures that interest is not added to the principal balance, which can save money over the life of the loan by reducing the total amount on which future interest is calculated. Even partial payments of accruing interest can help mitigate the effects of capitalization.