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The 150% Subsidized Loan Limit Explained

Sept. 23, 2014
Loans, Student Loans
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If you’re taking out federal loans to pay for your college education, time is of the essence for some of them.

With Direct Subsidized Loans, the government will cover your interest during your studies. But Uncle Sam’s helping hand won’t last forever. A rule called the “150% subsidized loan limit” restricts the amount of time you’re eligible for these loans.

Here’s a primer on the loan rule and how you can use it to your advantage.

[Read: A Guide to Refinancing Your Student Loans]

What’s the rule?

The “150% subsidized loan limit” went into effect in 2013. The rule, which applies to first-time borrowers after July 1, 2013, limits loan eligibility to 150% of (or 1.5 times) the length of your academic program.

For example, if you were enrolled in a two-year academic degree program, you would be eligible for these loans for three years; for a four-year program, you would get six years of eligibility.

“Students thus have an incentive to stay on track and finish their degrees in a reasonable amount of time. The limit also protects taxpayers, who fund the loan subsidies,” explains Sean Smith, director of financial aid at Westmont College in Santa Barbara, California.

Once eligibility has lapsed, “if students wish to borrow further, they would have to borrow unsubsidized loans,” notes Edwin Harris, director of enrollment management at Eastern Connecticut State University in Willmantic, Connecticut. This means that the “student has to pay the interest on the unsubsidized loan while they are in school,” Harris explains.

Loan amounts generally range from $3,500 to $5,500.

How does this affect me?

This new rule applies only to first-time borrowers of direct subsidized loans after July 1, 2013. To be a first-time borrower, you must have no outstanding balances on previous direct loans. If you paid off a loan from undergrad and then decided to take out a new loan for graduate school, you would be subject to the new time limit.

If you decide to change your academic program, your loan eligibility can change too. If your new program is longer, the window of eligibility increases. So if you go from a two-year program to a four-year program, your eligibility increases from three years to six years.  But it also goes the other way — switch to a shorter program and your window shrinks as well.

“Students who tend to ping-pong between different institutions may lose subsidized loan eligibility,” explains Pat Watkins, the director of financial aid at Eckerd College in St. Petersburg, Florida. You may have to start paying interest right away if you’ve already reached the end of what would be your new 150% time limit.

Pros and cons

“Subsidized loans are the most economical loans for borrowers to save money and keep monthly loan payments down,” says Watkins. Having an interest-free loan can be a useful tool in funding your education, but you should know the risks.

This rule means that once you reach the 150% time limit, you will no longer be eligible for more subsidized loans. Also, if you’re still enrolled but have reached the time limit, you will lose the interest subsidy on any of the loans you currently owe money on.

However, if you still need financial assistance, reaching the 150% time limit doesn’t keep you from taking advantage of other options.

How do I learn more?

For more information on direct subsidized loans, visit the U.S. Department of Education’s Federal Student Aid website. And if you’re not sure a subsidized loan is right for you, check out the department’s loan page.

Graduate photo via Shutterstock.