Subsidized Loan: An Overview

Jan 03, 2023 By Susan Kelly

A loan is said to be subsidized when the lender pays a part of the interest on the borrower's behalf in the form of a subsidy instead of charging the full interest rate. In most charges, the lender is the one who is responsible for paying the interest that is accrued on the loan throughout particular periods. The subsidy will have the effect of decreasing the borrower's monthly loan payment during the periods in which it is applied. As a result, the borrower will have an easier time managing the loan repayment, the overall cost of the loan will be reduced, and the borrower will save money. What is the difference between a subsidized and unsubsidized loan?

Comparison of Subsidized Loans to Unsubsidized Loans

The federal government provides access to subsidized and unsubsidized loan options; nevertheless, there are significant distinctions between the two types of financial assistance.

  • Only students enrolled in undergraduate programs are eligible for subsidized loans, although undergraduates, graduates, and those pursuing professional degrees may apply for unsubsidized loans.
  • Students applying for subsidized loans must provide proof that they need financial assistance, whereas students applying for unsubsidized loans are not. Students with a larger need for financial help are the target audience for subsidized loans; hence, these loans come with extra financial benefits.
  • With subsidized loans, the federal government pays the interest that accumulates. At the same time, the student is enrolled in school at least half time, during the grace period of six months after the student leaves school, and while the loan is in a deferred status. This is referred to as "subsidizing" the interest.

On the other hand, interest will start to be charged from the first day on unsubsidized loans. Any interest that is not paid before the end of the grace period or the loan deferment term will be capitalized, after which it will continue to accumulate interest at the normal rate. Interest is charged on private loans from the moment they are disbursed.

However, these two loans have certain similarities amongst them as well. Undergraduate students may choose between subsidized and unsubsidized loans, none of which requires a credit check, and the interest rate on both types of loans is the same.


  • Subsidized loans can help you save money in the long run since the interest on the loan will be covered by the federal government throughout the specified periods.
  • They provide a variety of convenient repayment choices, which are not available with private loans.
  • Compared to rates offered by private lenders for similar types of student loans, the rates of interest that apply to these loans are more favorable.


  • The amount of money you may take out in subsidized loans on an annual and cumulative basis is capped at a certain level. Your maximum loan amount is determined by your school, considering the federal restrictions (which may be found below), your level of financial need, and the number of years you have enrolled. If the maximum amount does not meet your needs, you can obtain an unsubsidized loan or a private loan to make up the difference.
  • Because they are not offered to graduate students, those already enrolled in an undergraduate program will have to go elsewhere.
  • To be qualified, you must establish that you need financial assistance; nevertheless, if your parents' income or your income is too high, you will not be eligible for the program.

When Do You Start Paying Off Subsidized Loans?

If you are enrolled in school for at least half time and have subsidized student loans, you won't have any repayment responsibilities as long as you stay in school.

Your loan servicer will contact you after you graduate to inform you of when the first payment on your student loans is due and how to make the payment. It is in your best interest to get an early start on repaying the loans and to pay more than the minimum required.

If you make the minimum payment required on your debts, paying them off might take a very long time. If you can contribute more, you will be able to pay off the loans faster, which will reduce the total cost of the loan since you will be paying interest for a shorter period. If you wish to make a higher payment, you should inform the company that services your loan that you want the additional amount to be applied to the payment for the current month. Otherwise, the company may unintentionally add it to the payment for the next month.

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