A Direct Subsidized Loan is a  type of loan offered by the US Department of Education for undergraduate students where the interest on the loan is paid for by the government on behalf of the borrower as long as they are enrolled at least half-time or are in their grace period. In the first year, a student can borrow up to $3,500 in subsidized funds if they show financial need. In the second year, the borrower can have up to $4,500 in subsidized funds. For third undergraduates and beyond, the cap of subsidized loan funds is $5,500. Annual loan limits may be less based on other financial aid received and the cost of attendance while enrolled. The interest rate on Federal Direct Loans is a fixed rate set annually based on 10-year Treasury plus 2.05%. Federal law created caps on these annual rates at 8.25%.