Both are federal Direct loans. Both have the same fixed rate for a given year. The difference is who pays the interest while you are in school, and over four years that difference is thousands of dollars.
Subsidised
Awarded based on demonstrated financial need. The Department of Education pays the interest while you are enrolled at least half time, during your grace period, and during approved deferment. Nothing accrues, so nothing capitalises. You begin repayment owing exactly what you borrowed.
Unsubsidised
Available regardless of need, with higher borrowing limits. Interest accrues from the day the money is disbursed, including every year you are studying. At the end of your grace period that accrued interest capitalises into your principal, and from then on you pay interest on it too.
The move that saves the most: pay the interest on unsubsidised loans while you are still in school. Even $25 a month keeps the accrued balance small so far less capitalises. You are not required to, which is exactly why it costs people so much.
How to tell which you have
Log into the federal student aid site. Every federal loan you hold is listed there by type, with its balance and rate. Your financial aid award letter also labels them, though the wording varies by school and is easy to skim past.
The borrowing order
Always accept subsidised loans before unsubsidised ones. They cost strictly less for the same money. Then unsubsidised, then compare PLUS against private options only after the first two are exhausted.
The short version
- Subsidised: government pays interest in school. Need-based.
- Unsubsidised: interest accrues from day one and capitalises at repayment.
- Take every subsidised dollar before any unsubsidised dollar.
- Paying interest during school on unsubsidised loans is the highest-value habit available.
Common questions
Which is better, subsidized or unsubsidized?
Subsidised, without exception. Same rate, same terms, but the government covers interest while you study, so you graduate owing less.
Can I get subsidized loans regardless of income?
No. Subsidised loans are awarded on demonstrated financial need from your FAFSA. Unsubsidised loans have no need requirement.
Should I pay interest while in school?
On unsubsidised loans, yes if you can. It prevents that interest capitalising into principal, which is what makes the balance grow beyond what you borrowed.