Subsidized vs. Unsubsidized Loans

Subsidized and Unsubsidized are the two main types of federal Direct Loans for undergraduate students. They differ in one critical way: who pays the interest during in-school periods.

Subsidized loans

The U.S. Department of Education pays the interest on Subsidized loans during:

• The time you're enrolled in school at least half-time
• The six-month grace period after you leave school
• Certain authorized deferments

That means a Subsidized loan doesn't grow during these periods — the balance stays the same as the amount you borrowed. Subsidized loans are need-based: you have to demonstrate financial need to receive them, and they're only available to undergraduates.

Unsubsidized loans

Interest on Unsubsidized loans accrues from the day the loan is disbursed, even while you're still in school. You can pay the interest as it accrues (most students don't), or let it accumulate. If you let it accumulate, the interest will capitalize (be added to your principal) at certain events — usually at the end of your grace period.

Why the distinction matters

A $20,000 Subsidized loan and a $20,000 Unsubsidized loan are quite different by the time you start repayment. The Subsidized loan is still $20,000. The Unsubsidized loan may be $22,000 or more, depending on the interest rate and how long you were in school.

Both are Direct Loans

For repayment purposes — IDR plans, PSLF eligibility, discharge programs — Subsidized and Unsubsidized are treated identically. Both are Direct Loans, both qualify for the same programs.