What’s the Difference Between Subsidized and Unsubsidized Loans?

The difference between subsidized and unsubsidized student loans depends mainly on who pays the interest on the loans during the in-school and grace periods.

The federal government pays the interest on subsidized loans while the student is enrolled in college at least half-time, during the grace period before repayment begins, and during periods of authorized deferment. If the student drops below half-time enrollment or graduates, repayment will begin at the end of the grace period. Authorized deferments include the economic hardship deferment, which is available for up to 3 years in total duration.

The borrower remains responsible for paying the interest on unsubsidized loans. If the borrower defers paying the interest as it accrues during the in-school, grace and deferment periods, the interest is capitalized (added to the loan balance). The borrower is responsible for the interest on both subsidized and unsubsidized loans during a forbearance.

In the federal Direct Loan program, interest is capitalized on unsubsidized loans when the repayment status of the loan changes. Read more