What Are Subsidized Loans?

As I start looking into college financing, I keep coming across terms like 'subsidized loan.' I know they're part of financial aid, but I'm not clear on what makes them different from other loans. Can someone explain in simple terms what a subsidized loan is, and why they might be a good option? Knowing this might help me and my family make better financial choices when it’s time to apply.

Of course, happy to help clarify! When it comes to student loans, there are two general types: subsidized and unsubsidized. The primary difference comes down to who pays the interest while you're in school or during deferment (a period of postponement of loan payments).

Subsidized loans are need-based, meaning they're offered based on your financial need which is determined from the information you include in your Free Application for Federal Student Aid (FAFSA). The big advantage of subsidized loans is that the U.S. Department of Education covers (or "subsidizes") the interest on these loans while you're in school at least half-time, during periods of deferment, and during the six-month grace period after you graduate, leave school, or drop below half-time enrollment.

On the other hand, with unsubsidized loans, the interest begins accruing as soon as the loan is disbursed, including when you're in school and during grace periods and deferment or forbearance periods. You're responsible for paying the interest during these periods.

So to put it simply, subsidized loans can be a good option because they generally cost you less over the long run since the government is paying the interest at certain points, not you. And while both subsidized and unsubsidized loans have to be paid back, the financial burden with subsidized can be a little lighter. Hope this helps to clear things up!