The primary difference between subsidized and unsubsidized federal student loans lies in who pays the interest while the student is in school and during certain other periods:
- Subsidized Loans are need-based loans available only to undergraduate students who demonstrate financial need. The U.S. Department of Education pays the interest on these loans while the student is enrolled at least half-time, during the grace period after graduation, and during deferment periods. This means the loan balance does not increase while the student is in school or in these periods
- Unsubsidized Loans are not based on financial need and are available to both undergraduate and graduate students. Interest starts accruing from the time the loan is disbursed, including while the student is in school, during grace periods, and deferments. The borrower is responsible for paying all the interest, which can be paid as it accrues or allowed to capitalize (added to the principal), increasing the total amount to be repaid
Additional distinctions include:
- Eligibility: Subsidized loans require financial need; unsubsidized loans do not
- Borrowing Limits: Subsidized loans have lower maximum amounts and aggregate limits; unsubsidized loans allow higher borrowing, especially for graduate students
- Repayment: Both loans have a grace period after leaving school before repayment begins, but interest accrues on unsubsidized loans during this time, while it does not on subsidized loans
In summary, subsidized loans are more favorable because the government covers interest during school and deferment periods, reducing the total cost of borrowing. Unsubsidized loans offer broader eligibility but result in higher overall interest costs since the borrower is responsible for all interest accrued from disbursement onward
