What is the Difference Between Subsidized and Unsubsidized Loans?

N. Madison

The major difference between subsidized and unsubsidized loans involves the payment of interest. With a subsidized loan, someone other than the borrower is responsible for paying the interest on the loan. When a loan is unsubsidized, the borrower must pay interest on the loan, beginning at the time of disbursement.

A student loan and financial aid application.
A student loan and financial aid application.

Often, the differences between these types of financing come into play when student loans are involved. When a student acquires a subsidized student loan, another party takes care of the interest. Typically, the entity paying the interest on a subsidized student loan is the federal government. In such cases, the federal government picks up the tab for the student’s loan interest while he or she is enrolled in school. The government also pays the interest on subsidized loans while students are within allowed grace periods and when loans are in deferment.

To be approved for a subsidized home loan, the borrower has to meet certain requirements.
To be approved for a subsidized home loan, the borrower has to meet certain requirements.

It is important to note that subsidized loans do not provide complete freedom from paying interest. Once a student is no longer enrolled at least halftime in school, he or she becomes responsible for paying interest on the loan. Interest does not accrue, however, when the loan is in a grace period or deferment. This is one way in which subsidized and unsubsidized loans are alike. At some point, the borrower usually does pay interest.

When an individual obtains an unsubsidized student loan, he or she may be able to avoid paying interest while enrolled in school by capitalizing it. In such cases, the capitalized interest simply adds on to principal amount that must be repaid. Once the student is out of school, he or she will have even more to repay because the new interest on the loan will be based on a combination of the loan principal and the interest that was capitalized during enrollment.

One of the most apparent differences between educational loans of this type involves the demonstration of need. With subsidized loans, students must demonstrate that they have a certain level of need for financial aid. The opposite is true of unsubsidized loans. Unsubsidized loans are typically available to students without regard to their financial circumstances.

Subsidized and unsubsidized loans may be held the same time. This means there is no need to wait to pay off one type of loan before obtaining another. Furthermore, there are some loans that are both subsidized and unsubsidized. With this type of loan, the borrower is responsible for some of the interest on the loan, but not all of it.

There is also subsidized and unsubsidized financing for housing. To be approved for a subsidized home loan, the borrower has to meet certain requirements, such as those related to income and place of residence. Subsidized loans are frequently a part of first-time buyer programs. They are typically designed to help those who would ordinarily have trouble purchasing a home. Unsubsidized home loans are generally not need or residency based.

A loan may be subsidized by any person, charity, organization, or government entity. Both subsidized and unsubsidized loans have specific eligibility and approval requirements. These requirements vary depending upon the type of the loan and the preferences of the lender.

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Discussion Comments


I have a large loan I've been paying on and had deferred for some time as well. A percentage is subsidized and a percentage is unsubsidized. The loan has built up capitalized interest each time I've had it on deferment. I've never heard of the government paying the interest on a subsidized deferred loan.

How do I find out if this has been occurring or how do I get this process started? I found out today, when the only loan representative that has ever bothered to tell me, told me that I qualified for active duty deferment with no interest and that the government pays the interest for subsidized loans. How do I get this started or is the loan company responsible to start the process?

I am currently on the student loan repayment plan and needing the huge amounts of interest to stop. If I call the loan company back I won't get the same representative and my chances of someone knowing what I'm talking about are small.


I suggest you go with the subsidized loan because the interest rate is much lower and you don't have to pay the loan till six months after graduation. That's when the interest starts. Subsidized will save you a lot of money. Trust me. I'm a financial major in college and i know all about these things.


What should you do if you have debt before going into school? Will that make it harder to get a subsidized loan?


well I just got awarded $1,000 unsubsidized loans.

should I take it or try to look for loan with a lower interest rate?


what if you need both loans to get through? Could you pay your car note with these loans?


I totally agree. I just finished school and my student loan is at 6.80 percent interest. My car loan is lower than that! Beware, students!


As someone who used unsubsidized loans instead of subsidized ones to get through school, I can tell you that it makes a huge difference and you should really try to get subsidized loans!

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