What is the difference between subsidized and unsubsidized loans?

The distinction between subsidized and unsubsidized loans is an important consideration for students seeking financial assistance for their education. Both types of loans are offered by the U.S. Department of Education through the Direct Loan program, but they have key differences regarding interest accrual and eligibility requirements. Subsidized loans are need-based loans, meaning that they are awarded based on the student's financial need as determined by their Free Application for Federal Student Aid, commonly known as FAFSA. One of the notable benefits of subsidized loans is that the U.S. Department of Education pays the interest while the borrower is in school at least half-time, during the grace period, and during any authorized periods of deferment. This results in the borrower being responsible only for the principal amount borrowed, without accumulating interest during these periods. Unsubsidized loans, on the other hand, are available to all eligible students regardless of financial need. Unlike subsidized loans, the borrower is responsible for paying the interest on an unsubsidized loan from the date of disbursement. If the borrower chooses to defer interest payments while in school, the accrued interest will capitalize, meaning it will be added to the principal balance of the loan when repayment begins. This can lead to higher overall loan costs in the long term. In summary, the primary difference lies in the interest payments and the criteria for borrowing. Subsidized loans are need-based and have the interest covered during specific periods, while unsubsidized loans are available to everyone and accrue interest immediately. For additional information, individuals can refer to the official student aid website.