The Budget Control Act of 2011, signed into law on Aug. 2, 2011, eliminates the Federal Direct Loan subsidy for graduate and professional students effective July 1, 2012. As a result, summer 2012 is the last term that graduate and professional students may be eligible to receive Federal Direct Subsidized loans, although they will continue to be able to receive unsubsidized loans. 

The Act also eliminates the upfront rebate for all Federal Direct Loans. Starting July 1, 2012, Federal Direct Subsidized and Unsubsidized loan disbursements will have a one percent origination fee, and Federal Direct PLUS loans will have a four percent origination fee applied at disbursement.

What does this mean for you?

Beginning July 1, 2012, new federal graduate/professional school loans will no longer be subsidized. 

Subsidized Versus Unsubsidized Loans
Subsidized loans are interest-free while you are in school or otherwise have a deferment (authorized break from payments). As an example, let’s say you spent four continuous years in college, plus two years in graduate school. You have a subsidized loan from your first semester for $1,000 with a 5.3 percent interest rate. After completing your schooling, you would only owe the original $1,000, thanks to the subsidized nature of the loan. If your loan was unsubsidized, you would owe your loan balance, plus any interest occurred totaling $1,318.

Past Loans
Rules aren’t changing for subsidized loans you have borrowed in the past. If you qualify for a deferment for reasons such as going back to school to get your Ph.D., you will still not get charged interest for the specified time period. If you borrow federal student loan money after July 1, 2012, new loans won’t be subsidized for graduate school and beyond.

Borrowing Limits
If you are starting or continuing a graduate degree program effective July 1, 2012 or later, borrowing limits won’t change. The difference is all of your new loans will be unsubsidized. If you qualify for Federal PLUS Loans, you can borrow additional funds. However, these loans are unsubsidized, too.

Consolidation
If you have consolidated your federal student loans or intend to consolidate after graduation, your subsidized loans will not be affected. Even though you pay via a single check or electronic payment, your unsubsidized and subsidized loans are separated in consolidation in case of future deferments.