Which Type of Loan Is Based on Financial Need?

which type of loan is based on financial need

Which type of loan is based on financial need? Subsidized loans, a type of student loan, are based on the financial need of each undergraduate student. With subsidized loans, the financial need of the applicant is determined by looking at the cost of attendance to their college/university against any family contributions, grants, scholarships, etc. 

Apart from mortgages and extreme debt consolidation, student loans are one of the most common ways people seek out financial aid. Qualification for federal financial aid will depend on several factors, such as:

  • Education status (graduate or undergraduate). 
  • Parent’s income/expected family contribution. 
  • Where you plan to attend school. 
  • School’s cost of attendance. 
  • The state you live in and the state where your school is located. 

Depending on your qualifications, you may be able to qualify for grants, unsubsidized loans, subsidized loans, or scholarships.

Here, you will learn about federal student aid, how student loans work, unsubsidized and subsidized loans, and other ways you can pay for a higher education after high school. 

What Are the Different Types of Need-Based Financial Aid?

Financial Aid TypeEligibility Need-BasedRepayment RequiredInterest Payment Responsibility Additional Notes
Subsidized Loans Undergraduate students. YesYesGovernment pays while in school and during grace / deferment periods. Amount determined by school. 
Direct Unsubsidized Loans Undergraduate and graduate students. NoYesN/AAmount determined by school.
Grants (e.g., Pell Grant)Undergraduate and some graduate students. YesNoN/AAmount varies, does not need to be repaid. 
Federal Work-StudyStudents with financial need. YesNo (earned as wages) N/APart-time work, earnings used for education expenses. 
Need-Based Scholarships Students with financial need. YesNoN/AVarious sources, does not need to be repaid. 
Private Loans Undergraduate, graduate, and professional students. NoYesStudent responsible from disbursement.Credit-based may require cosigner. 
Merit-Based Scholarships Students demonstrating excellence in academics, athletics, or service. NoNoN/ABased on talent or achievement, not financial need. 
Disclaimer: The information provided in the above chart is intended for general informational purposes only and is not exhaustive. Eligibility requirements, conditions, and terms for financial aid can vary based on individual circumstances and are subject to change based on federal regulations, institutional policies, and availability of funds. While we strive to keep the information up to date and accurate, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the chart or the information, products, services, or related graphics contained in the chart for any purpose. Any reliance you place on such information is therefore strictly at your own risk. We encourage students to consult with their school’s financial aid office or a financial advisor for personalized advice and the most current information.


Grants are a lump sum of funding offered by the federal government or other financial institutions. With a grant, students are not required to pay back the funding they are offered. In many states, grants are provided to students who attend a local college or university. There are also both need-based and non-need-based grants offered to both undergraduate and graduate students. 

The most common type of federal grant is the Pell Grant, which offers $650-$6,895 to eligible students each academic year. Undergraduate students may receive Pell Grants for up to six years or the equivalent of 12 semesters. According to the Education Data Initiative, about 88% of Pell Grant funds go to public universities.1 

Federal Work-study 

Federal work study is a program where students get a job while in school and use their earnings to pay for their education. Typically, students can arrange for their federal work-study earnings to go directly toward their tuition, or they can choose to receive their earnings in a paycheck to spend how they see fit. 

Subsidized and Unsubsidized Loans 

Depending on your offers and choices, you may end up with either a subsidized or unsubsidized loan. These types of funding, sometimes referred to as subsidized or unsubsidized Stafford Loans, are used to help qualified students pay for higher education at institutions such as: 

  • Four-year college or university. 
  • Community colleges. 
  • Trade, career, or technical schools. 

Direct Subsidized Loans

A direct subsidized loan is funding that is available to undergraduate students who show a need for financial assistance. With a subsidized loan, students do not choose how much funding they would like to receive; instead, the school decides on the maximum loan amount. 

Students who receive direct subsidized loans don’t have to worry about paying interest while they are in school (at least half-time). During this time, the U.S. Department of Education (ED) pays for the student loan interest rates. Furthermore, students are exempt from paying interest for the first six months (known as a six-month grace period) after they have graduated and may be eligible for an additional postponement on their loan repayments.

Direct Unsubsidized Loans

Direct unsubsidized loans are available to both undergraduate and graduate students and are not based on a need for financial assistance. Similar to a subsidized loan, the student’s school, college, or university will determine the maximum loan amount for their direct unsubsidized loan.

The most significant difference between subsidized and unsubsidized student loans is interest rate payments. Students who receive direct unsubsidized loans are responsible for paying interest charges during their entire loan period, including when they are still in school. If students choose not to pay interest while they are in school, they will accrue interest charges that they will still ultimately be responsible for paying back. 

Need-based Scholarships

Another way students may be able to qualify for financial aid to pay for school is through need-based scholarships. There are thousands of scholarships offered by both the federal government and independent sources that can grant students with hundreds or even thousands of dollars to pay for school. However, according to the Education Data Initiative, only 7% of college students will receive scholarship funding.2

Alternatives to Federal Student Aid

Fortunately, there are plenty of choices available besides need-based financial aid when it comes to paying for school. Below are a few of your other financial aid options. 

Private Loans

If you do not qualify for federal funding, there are always private student loans to fall back on. Private student loans are available for both undergraduate students as well as graduate and professional students. 

Private loans are also generally not need-based, which means you may be able to qualify regardless of your financial situation/background. Applying for private student loans works similarly to applying for any other type of financing. Potential borrowers simply fill out an application, send in their documents, and receive their loan funding upon approval. 

Merit-based Scholarships 

There are also merit-based scholarships available to students who have demonstrated a passion or talent for academics, athletics, or public service. Students may either be nominated by a teacher or advisor, or they may submit an application to apply for this type of financial aid. 

Ways To Pay off Student Loan Debt

After you graduate or stop going to school, you’ll have to start focusing on student loan repayment. Hopefully, your higher education came with some job connections that will help you establish a successful career so you can easily pay off your private or federal student loans. In the meantime, you can set yourself up for success by taking advantage of the helpful tips below. 

Get a Savings Account

If you don’t have one already, set up a savings account as soon as you apply for federal student loans or financial aid. Then, as you attend school and prepare to pay back your loans, set as much money as you can aside in your savings account. That way, when you graduate, you have a bit of a safety net established to help pay back your federal or private student loans.

You can also sign up for autosave to have money taken from your checking account and deposited into your savings account. This way, you can start saving money without having to remember to set cash aside each month!  

Work on Building Credit

It’s also important to work on building credit as a college student. By being financially responsible during your student years, you can hopefully set yourself up with a higher credit score once you graduate. Having a higher credit score will make it easier to find approval for a debt consolidation loan and other financial opportunities once you are out of school. 

A few ways you can go about building credit as a student are: 

  • Make any due payments you have on time (subscriptions, rent, etc.).
  • Avoid unnecessary loan or credit applications. 
  • Try to keep a low or no balance on any credit cards you may have. 

Make Higher Payments

When it is finally time to start paying back your student loans, try making larger loan payments instead of your minimum amount due. The more you chip away at your total loan balance, the less funding there is to charge interest on. So, not only will you pay off your loans sooner than expected by paying more each month, but you’ll also save money on interest rates too! 

Consolidate Debt After Graduation

After you have graduated, it may be a good idea to consolidate your various student loans into one convenient payment. Personal installment loans can be a great way to consolidate your student loan debt and potentially save you money on payments and interest rates. If you worked on building your credit while you were in school, you may be able to qualify for a good deal on a debt consolidation loan. Otherwise, there are other options for refinancing student loans with bad credit. 

Student Loan Forgiveness

There are several types of student loan forgiveness programs, which include the following: 

  • Public service loan forgiveness. 
  • Teacher loan forgiveness. 
  • Closed school discharge. 
  • Perkins loan cancellation and discharge. 
  • Total and permanent disability discharge. 
  • Discharge in death. 
  • Discharge in bankruptcy (approved under rare circumstances_.
  • Borrower Defense to Repayment. 
  • False certification discharge. 
  • Unpaid refund discharge. 
  • Forgery discharge. 

If you do seek out loan forgiveness options, be sure to stay away from student loan forgiveness scams. One surefire way to tell that an offer is a student loan forgiveness scam is if a creditor asks for payment upfront. No creditor should ever ask you for immediate payment before they have provided you with any lines of credit or financial services. 

FAQ: Financial Need-Based Loans

What is the Federal Direct Loan Program, and how does it relate to subsidized loans? 

The Federal Direct Loan Program is a federal loan initiative that includes various types of loans, including direct subsidized loans. These loans are provided by the government and are designed to assist students with a demonstrated financial need in covering the costs of higher education.

How do I apply for need-based financial aid such as subsidized loans? 

To apply for need-based financial aid, including subsidized loans, students must complete the Free Application for Federal Student Aid (FAFSA). This application will determine your eligibility for need-based financial aid, including federal loans.

Can I receive both subsidized and unsubsidized loans at the same time? 

Yes, students can receive both subsidized and unsubsidized loans simultaneously. However, the total amount of federal loans disbursed cannot exceed the cost of attendance, and your eligibility for subsidized loans is based on financial need.

How is the amount of financial aid, including subsidized loans, determined? 

The amount of financial aid, including subsidized loans, is determined by your expected family contribution (EFC), year in school, enrollment status, and the cost of attendance at your institution. The financial aid department at your college or university will calculate your aid package based on these factors.

What are the main differences between direct subsidized loans and other federal loans? 

The key difference between direct subsidized loans and other federal loans is that the interest on subsidized loans is paid by the government while you are in school at least half-time, during the grace period, and during deferment periods. Other federal loans, like unsubsidized loans, accrue interest from the time they are disbursed.

How much need-based financial aid can I expect to receive from the government? 

The amount of student aid you can receive from the government varies based on your financial need, cost of attendance, and other financial aid received. The maximum amount for direct subsidized loans also depends on your academic level and dependency status.

Are there any income thresholds to qualify for direct subsidized loans? 

There are no specific income “cut-offs” for direct subsidized loans, as eligibility for need-based financial aid is determined by a variety of factors, not just income. The FAFSA will take into account your family’s financial situation, including income, assets, and other liabilities.

What happens to my subsidized loans if I drop below half-time enrollment? 

If you drop below half-time enrollment, you will lose the interest subsidy on your subsidized loans, and interest will begin to accrue. Additionally, you may enter the grace period, after which repayment will begin if you do not return to half-time status.

Can I defer payment on subsidized loans if I go to graduate school? 

Yes, you can defer payments on your subsidized loans while you are enrolled at least half-time in graduate school. During this deferment period, the government will continue to pay the interest on your subsidized loans.

Is there a limit to how much financial aid I can receive each year? 

Yes, there are limits to how much financial aid you can receive each year. These limits are set by the federal government and depend on your status as a dependent or independent student, your year in school, and other factors. The financial aid office at your institution can provide specific information based on your individual circumstances.

A Word From CreditNinja on Federal Student Loans and Financial Need

CreditNinja knows paying for school is something just about every student has to plan for. While there are student loan calculators and other tools to help make the process easier, things can certainly seem overwhelming. If you ever have any questions about your federal student aid before, during, or after your time at a college or university, you can contact the school’s financial aid office.

Looking for more information about handling your own finances, bad credit loans, and combating the young American debt crisis? Check out the CreditNinja dojo for tons of resources available for free! 


  1. Pell Grant Statistics [2023]: How Many Receive per Year | Education Data Initiative
  2. College Scholarship Statistics [2023]: Yearly Total + Analysis | Education Data Initiative
  3. Subsidized and Unsubsidized Loans | Federal Student Aid
  4. Loans | Federal Student Aid
  5. Student loans | Consumer Financial Protection Bureau
  6. Student Loan Forgiveness | Federal Student Aid
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