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A Direct Subsidized Loan is a type of federal student loan available to students who demonstrate financial need. The federal government subsidizes this type of loan by paying the interest that accrues while the student is enrolled in school at least half-time and during qualifying periods of deferment, such as the grace period.

The Direct Subsidized loan is one of three federal student loans available to student borrowers. The others are the Direct Unsubsidized Loan, Direct PLUS Loan, and Direct Consolidation Loan. Read on for more information about the benefits of Direct Subsidized loans and details about other types of student loans available to eligible students.

What Are the Benefits of a Federal Direct Subsidized Loan?

Like other types of student loans, you will be responsible for paying back your Federal Direct Subsidized Loan after you finish school. Unlike many other student loans, however, having a Direct Subsidized loan means you won’t be responsible for paying interest while you are in school or during a six-month grace period after graduation (or during other deferment periods). The U.S. Department of Education subsidizes this type of loan by paying the interest on your behalf during those periods.

Since the government is paying the interest that accrues while you are in school and during the grace period, no interest will be added to your balance before you begin repayment. This might sound like a minor detail, but not having to pay interest while you are in school and for six months after you graduate can significantly reduce the overall cost of your loan.

Like an Unsubsidized Direct loan, you’re not obligated to make payments during school — and the interest rate is relatively low. For the 2023-24 academic school year the interest rate for a Subsidized or Unsubsidized Direct Loan is 5.50%.


💡 Quick Tip: You’ll make no payments on some private student loans for six months after graduation.

How Do You Apply for a Federal Direct Subsidized Loan?

To apply for a Federal Direct Subsidized Loan, you will need to complete the Free Application for Federal Student Aid (FAFSA). The FAFSA is available for free online, and contains questions about you and your family’s financial circumstances.

The information you submit through the FAFSA is transmitted to your school and then used to determine what types of aid (including federal loans, grants, scholarships, and work-study) you are eligible to receive. The FAFSA must be completed annually.

There is no credit check involved in applying for a Federal Direct Subsidized (or Unsubsidized) loan, and you don’t need to worry about having a certain credit score.

How Is Your Eligibility for a Federal Direct Subsidized Loan Determined?

After your FAFSA has been reviewed, your selected school will send you an award letter that tells you your total cost of attendance, the award money you’ve been given, and what federal aid programs and loans you qualify for based on your FAFSA information.

You school will determine exactly how much you are eligible to borrow in federal loans based on a number of factors, including the amount the federal government expects you and your family to contribute to your educational costs, your current enrollment status, the school’s cost of attendance, any other financial aid you receive, and whether you are a dependent or independent student.

However, there are limits on the amount you can borrow with a Direct Loan, regardless of your financial need. If you are a dependent student, you can borrow a total of $31,000 for your undergraduate education in federal loans, but no more than $23,000 of this amount may be in Direct Subsidized Loans. Graduate and professional students cannot borrow subsidized loans.

Beyond Subsidized Loans: Other Options Available to Student Borrowers

Since eligibility for Direct Subsidized Loans is based on borrower need, and there are annual borrowing limits, you may be interested in learning about other available loan options. There are three other types of federal loans, and some borrowers may also want to consider private student loans.

The three types of federal loans available outside of Direct Subsidized Loans are:

•   Direct Unsubsidized Loans These loans are available to undergraduate and graduate students, and eligibility is not based on financial need. Unlike Direct Subsidized Loans, however, interest starts accruing as soon as the money is disbursed to your school. You may choose not to pay this interest while you’re in school and during your six-month grace period, but any unpaid interest that accumulates during this time will be added to your total balance. How much you can borrow with an unsubsidized loan depends on your year in school as well as if you’re a dependent or an independent student.

•   Direct PLUS Loans PLUS Loans are options for graduate/professional students and parents of students who are interested in borrowing a loan to help their child pay for college. Eligibility for this type of loan is not based on need, but the application process does require a credit check. The terms of these loans are somewhat less favorable than Direct Loans, which is why families will want to look at Direct Unsubsidized and Subsidized loans first. The interest rate on PLUS loans for the 2023-24 academic year is 8.05%. These loans also have an origination fee of 4.228%.


💡 Quick Tip: Parents and sponsors with strong credit and income may find much lower rates on no-fee private parent student loans than federal parent PLUS loans. Federal PLUS loans also come with an origination fee.

•   Direct Consolidation Loan This federal loan isn’t awarded to borrowers as a part of their financial aid package. Instead, a Direct Consolidation Loan allows borrowers with multiple federal loans to combine (or consolidate) them into a single loan, usually after school. The loan’s new interest rate is the weighted average of the current interest rates on the student loans that will be consolidated, rounded up to the nearest one eighth of a percent.

Private student loans are available through private lenders, including banks, credit unions, and online lenders. They come with a variety of terms and can offer competitive interest rates for students (or parent cosigners) with good or excellent credit. Unlike federal student loans, which offer only fixed rates, private student loans can have fixed or variable interest rates.

Also unlike federal student loans, private student loans often don’t charge any fees, such as an origination fee. However, private student loans don’t come with the same protections, such as government-sponsored loan forgiveness and income-driven repayment plans, as federal loans. Because of this, you may want to consider private loans only after you’ve exhausted federal loan options like Direct Subsidized loans and other sources of federal aid.

To apply for private student loans, potential borrowers will need to fill out an application directly with the lender of their choice.

The Takeaway

Borrowers with Federal Direct Subsidized Loans are not responsible for the interest that accrues while they are enrolled in school at least half-time or during the grace period or other qualifying periods of deferment. The interest is subsidized by the U.S. government. To qualify for this type of federal student loan, borrowers must be qualifying undergraduate students who demonstrate financial need.

Other options for students looking to pay for college may include Federal Direct Unsubsidized loans and PLUS Loans, scholarships and grants, and federal work-study programs, and private student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Making principal-only payments on student loans (either monthly or just occasionally) can help speed up the payback time and lower your overall borrowing costs. But just making extra payments on your loan won’t necessarily lower your loan’s principal balance. You typically need to take a few extra steps to ensure that your extra payments actually go toward principal — and not interest on the loan.

Reed on to learn exactly what a principal-only student loan payment is and how to be sure you’re doing it right.

What Is a Principal-Only Student Loan Payment?

To understand what principal-only payments are, it helps to understand how student loan repayment works.

When you take out a student loan, you need to repay the principal balance. (the amount you borrowed), interest (the cost of borrowing the principal) and, in some cases, fees (which are often paid up front).

When it’s time to start repaying your student loan, you are usually required to make at least a minimum payment each month. That payment will go towards both your principal balance and interest. In the beginning, most of your payment will go toward interest and very little towards principal. Over time, however, the balance shifts — more of your monthly payment will go toward principal and less will go towards interest.

Fortunately, student loans have no prepayment penalties. This means that If you make an extra, principal-only payment, it will lower the principal balance of your loan, and the lender will not be able to charge you a fee for paying some of your loan off early.

Unfortunately, when a lender receives a payment beyond the minimum due each month, they may simply apply it to next month’s bill rather than use that money to lower your principal. This means there are certain steps you need to take to make sure the money will only go towards principal (more on that below).

💡 Quick Tip: Pay down your student loans faster with SoFi reward points you earn along the way.

Why Making Principal-Only Payments Can Make a Difference

Since interest on a student loan is calculated daily on the principal balance at that time, the less principal you have left to pay, the lower your interest costs. As a result, paying extra on your student loan — and having that money go directly to the principal — can save you a significant amount of money. It also helps you pay off your student loans faster.

Of course, not everyone is in a position to pay more than the required amount in any given month, and that’s fine, too. You might simply choose to use an occasional windfall — such as a bonus at work or a cash gift — to make a principal-only payment on your student loans.

Recommended: 9 Smart Ways to Pay Off Student Loans

How to Make Principal-Only Payments on Student Loans

Just making an extra payment on your student loan doesn’t necessarily mean you are making a principal-only payment.

Generally, student loan servicers apply your payments first to cover any late fees you’ve incurred and then to accrued interest before they apply anything to your principal. Here are some tips that can help ensure any extra payments you make go toward your principal.

Tell Your lender Where to Direct Extra Payments

If you pay online through the servicer’s website, you might have the option to choose how the money gets applied. There may be an option that says “other amount” where you can enter an extra amount you want to pay towards your loan that month, as well as where that money should be applied, such as to the interest only, the interest and principal, or just the principal.

In some cases, you might see an option for “Do not advance the due date.” Clicking this will ensure that your lender treats your funds as an extra payment rather than applying them toward next month’s bill.

If you want to make a larger payment every month and have the extra applied to principal, you may also have the option of setting up standing instructions online, telling your servicer to send any extra money towards the principal.

If you pay by check or don’t see these options online, you’ll need to contact your loan servicer and ask how to make occasional or regular principal-only payments. You may need to send a standing order in writing.

Apply Extra Payments Strategically

If you have more than one student loan, you can typically request that your student loan servicer apply your extra payments to a specific loan (such as the loan with the highest interest rate) in order to ensure you can save money and meet your debt repayment goals.

There are two common approaches to paying down debt on multiple loans:

•   The snowball method This involves paying off the smallest loan first, then moving on to the next-biggest loan. This approach can give you a sense of making progress, and motivate you to keep going.

•   The avalanche method This tackles the loan with the highest interest rate first. Putting extra payments on the most expensive loan will save you the most money. However, it won’t allow you to cross a loan off your list as quickly.

Recommended: 6 Strategies to Pay off Student Loans Quickly

Keep a Close Eye on Your Statements

To make sure your principal-only payment was just that — it went to principal only — it’s a good idea to check your online account or loan statements each month to make sure any extra payments you made were correctly applied. You’ll also want to make sure the money was applied to the loan you specified.

If your lender didn’t apply your extra payment to the principal balance, you’ll want to reach out to ensure that future payments are accurately applied.

💡 Quick Tip: Federal student loans carry an origination or processing fee (1.057% for Direct Subsidized and Unsubsidized loans first disbursed from Oct. 1, 2020, through Oct. 1, 2024). The fee is subtracted from your loan amount, which is why the amount disbursed is less than the amount you borrowed. That said, some private student loan lenders don’t charge an origination fee.

Consider Refinancing Student Loans for Better Rates

Making principal only payments isn’t the only way to lower your interest costs and/or pay off your loan early. You might also be able to do this by refinancing your student loans with a private lender, such a bank, credit union, or online lender.

With a student loan refinance, you exchange one or more of your old loans for a new one, ideally with a lower rate or better terms. This process can be helpful if you have a solid credit score (or have a cosigner who does), since it might qualify you for a lower interest rate. In addition, you could choose a shorter repayment term to get out of debt faster.

You can refinance both federal and private student loans. Keep in mind, however, that refinancing federal student loans can result in a loss of certain borrower protections, such as income-driven repayment and student loan forgiveness. Because of this, you’ll want to consider the potential downsides of refinancing before making changes to your debt.

The Takeaway

The thought of finding extra money — beyond your required monthly payment — to pay down student debt may be daunting. But the benefits could make it worth the effort and sacrifice. Making principal-only payments will help reduce the interest you pay over the life of your student loan. And, the more often you pay down your principal balance, the faster you’ll pay off your student loans.

If you choose to make principal-only payments, you’ll want to communicate with your lender to make sure that those additional payments are applied only to your loan’s outstanding principal.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Figuring out when you have to start paying back student loans can be a bit tricky, but in 2023 it’s more complicated than usual. A pause on all federal student loan payments has been in effect since 2020, but that pause has come to an end.

For new grads, most federal student loans have a six-month grace period after you finish school, during which borrowers don’t have to make payments. The payback terms on private student loans are set by individual lenders, which may or may not offer a grace period.

Whether you’re a new grad or a federal student loan borrower wondering when your paused payments will resume, read on to find out when you have to start paying back your student loans.

Student Loan Payment Pause Ends

In March 2020, at the beginning of the Covid-19 pandemic, the federal government ordered the suspension of payments, interest, and collections on most federally held student loans. Three years later, borrowers will restart making loan payments in the fall of 2023.

When the time comes, borrowers should receive a billing statement from their loan servicer at least 21 days before their payment is due. The statement will provide the latest information on payment due dates, monthly amount, and interest accrued.

What else you can do: Make sure your contact information is up-to-date on your loan servicer’s website and in your StudentAid.gov profile. And to refresh your memory on all things student loans, read our summary of the basics of student loans.

What Is a Student Loan Grace Period?

A grace period is the time you’re given after graduation before you have to start paying back your student loans. The federal government and many private lenders understand that you might not find a steady job straight out of college.

Both Direct Subsidized and Unsubsidized Loans have a grace period. Direct PLUS loans for graduate students and parents don’t have a grace period. Make sure you understand which loan you have so you’re financially ready to start making payments.

While the grace period gives you time to find a job before you have to start making payments, it’s important to understand that unsubsidized federal student loans will continue to accrue interest during the grace period.

Usually, at the end of the grace period, the interest is capitalized onto the principal (or original amount borrowed). This becomes the new value of the loan, and interest continues to accrue based on this new value. However, new federal regulations will eliminate interest capitalization when borrowers first enter repayment.

Recommended: How Much Money to Budget for Student Loans

Federal vs Private Loans: Key Differences

There are two main types of student loans: private student loans and federal student loans. Private student loans are borrowed from a bank, credit union, or another lender. Federal loans are backed by the U.S. Department of Education. Important differences between the two include:

•   Only federal student loans were eligible for the payment pause.

•   Fixed interest rates on federal student loans are generally lower than for private loans.

•   Only federal student loans are eligible for income-driven repayment plans, deferment and forbearance, and federal loan forgiveness.

When to Start Paying Federal Student Loans

As noted above, both direct subsidized and unsubsidized loans offer a six-month grace period where loan payments are not required after a student graduates. Here’s how the payment pause may affect your grace period:

•   Students who graduated in December 2022 or earlier will make their first payment after October 1, 2023.

•   Students who graduated in June 2023 will make their first loan payment in December.

When to Start Paying Private Student Loans

Some private student loans operate with a six-month grace period, similar to federal student loans. But not all. If you have a private student loan, check your loan terms to see if you have a grace period.

If you’re looking to take out a private student loan with a grace period, consider reviewing different lenders to see who has the best terms. Unlike federal student loans, interest rates for private student loans vary based on individual factors including your credit history. Because of this, your interest rate might be higher than it would be with federal loans.

Recommended: Private Student Loans Guide

Can You Get More Time Before Paying Back Student Loans?

If you’ve already graduated and you’re having trouble finding a job in your field, you might be stretching your finances as thin as they go. Even your student loan repayments might not get priority. Before you let late payments get the best of you, consider what options are available.

It may be possible to talk to the loan servicer about delaying your payments a little longer. Your lender doesn’t want you to be late either, and might be willing to work with you.

Extended Deferment or Forbearance

Borrowers with federal student loans might qualify for student loan deferment or forbearance, which allow you to temporarily pause payments. Keep in mind that interest may still accrue while your loans are in deferment or forbearance, depending on the type of loan you hold. You’ll be responsible for that interest regardless of when you start making your payments.

The start date of those repayments isn’t the only thing you should be concerned with. If you have student loans, lowering your payment amount is probably on your mind as well. Not sure what your monthly payment is? Use our student loan calculator to estimate your student loan payments.

Can You Lower Your Student Loan Payments?

Depending on the type of loans you have, there are a few different ways you can lower your student loan payments.

Consolidation

If you have many different federal student loans, you might want to consider student loan consolidation. Consolidating your existing loans with a Direct Consolidation Loan means combining all of your federal loans into a single loan and potentially lengthening the term so your payments go down. A longer term, however, means paying more interest over the (now longer) life of your loan.

Your new interest rate will be the weighted average of all your federal loans combined, rounded up to the nearest eighth of 1%, which means consolidation might not lower your interest rate.

Refinancing

Refinancing your student loans is similar to consolidation. However, a refinanced loan uses your credit history to determine your interest rate. Ideally, refinancing will lead to a lower rate. It’s important to note that refinancing student loans forfeits protections that come with federal student loans, like forbearance and income-driven repayment plans.

It’s also possible to lengthen or shorten your loan term. Refinancing can be done with private student loans, federal student loans, or both. Just remember that lengthening the loan term may result in paying more in interest over the life of the loan.

For more on this option, read our take on the advantages of refinancing student loans.

Income-Driven Repayment Plans

If you have federal student loans and have a lower income, you might want to look into Income-Driven Repayment plans. There are a few different IDR options that vary based on your income and family size. And recent changes by the Biden Administration make the plans an even better deal for borrowers.

All IDR plans forgive the remaining balance on your loans either 20 or 25 years after you begin paying the loan back. This could be an option to consider if you are a recent grad. Note that while the remaining balance is forgiven at the end of an IDR loan term, that amount may be considered taxable income by the IRS.

What Happens if You Don’t Start Paying Back Student Loans?

If you don’t start paying back your student loans, you can face some pretty serious financial consequences. Your loan will become delinquent after the first day of missed payments. Once you’re 90 days late making a payment on your federal loans, your loan servicer will report the delinquency to the credit reporting bureaus and your credit score will take a hit.

If you have a private student loan, your lender may report you to the credit reporting bureaus after just 30 days. A lower credit score can make it more difficult to secure credit and loans in the future, and if you do get a loan, it might come with less favorable terms and a higher interest rate.

Student Loan Default

After 270 days, your federal loans will enter default. Private loans may default after 120 days, and Federal Perkins loans can enter default immediately after you miss a payment.

Once you’re in default, your credit will take another hit. You might also be subject to having your wages garnished (though the rules on this are different when it comes to federal vs. private student loans).

In addition to wage garnishment and damage to your credit, you may also experience the following negative consequences:

•   Late fees. For example, federal loans that are 30 days late may encounter late fees of 6% of the amount due.

•   Loss of eligibility for loan deferment or forbearance once you default on federal loans.

•   No longer able to choose your repayment plan for federal loans.

•   The government may withhold your tax refund if you fail to pay federal loans.

•   Loss of eligibility for financial aid.

The Takeaway

The payment pause on federal student loans has ended. If you graduated in or before December 2022, your first federal student loan payment will be due sometime after October 1. If you graduated in June 2023 or later, your first payment will be due after six months. Your loan servicer will provide you with a billing statement at least 21 days before your first payment is due. If you can’t afford to resume your monthly payments, federal loan holders have options: deferment, an income-driven repayment plan, or refinancing. Some private student loans also offer grace periods; check with your loan servicer to find out.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.