What is a Subsidized Loan

A subsidized loan is a loan where by interest is not required to be paid by the person receiving the loan. In fact, the interest is paid by the federal bank. Subsidized loans are quite popular in the U.S. where students who need financial assistance to complete their education are provided subsidized loan. Interest is not charged to them until they complete six months grace period after completion of school.

Students and their parents are entitle to different types of direct loans in the U.S. such as subsidized loans, unsubsidized loans, parent loans, and grad plus loans under the Federal Direct Loan Program. Students are awarded such loans to help them pay their school and tuition fees. Stafford loan is one of the most popular forms of subsidized student loans in the U.S. where the interest is paid by the U.S. government. Another popular subsidized student loan in the U.S. is the Perkins loan.

Subsidized loans are better as compared to unsubsidized loans, as the government pays the interest on behalf of the students during school. While in the case of unsubsidized loans, students have to pay the interests, as it builds up or it gets added to the principal amount. In addition, interest charged on a subsidized loan is much less as compared to the one charged on an unsubsidized loan.

A universal formula is used to calculate a family’s financial condition to pay for the child’s school and college fees by the federal government in the USA. A student whose family is not willing to pay the fees due to location of the institute, program options opted for, and size of the school or college is not eligible for the subsidized loan.

However, a student needs to be qualified in order to be awarded a subsidized loan. For example, a student in the U.S. is entitled for a subsidized loan if he or she is enrolled for half time in school or college; within a certain deferment period; and during grace period. If the above mentioned criteria are not met, the student is required to pay the interest and also repay the loan.

Apart from the federal government banks, charitable trusts and religious organizations can also issue a subsidized loan. The duration for which the loan is subsidized will be decided by the trust and the organization to help the borrower avail the benefit of interest free loan until his or her financial condition improves. The term for which the loan is subsidized is outlined when the loan is issued and once the set term is over, the borrower needs to start paying the interest.

Similar to the U.S., subsidized loans also exist in other countries. For example in India, the Central Scheme to provide Interest Subsidy (CSIS) is run by the Ministry of Education to support students of the weaker section of the society. Income background of the parents is taken as the base for judging the student’s eligibility to avail the scheme benefits.