What is the difference between subsidized and unsubsidized loans?

Subsidized and unsubsidized loans are two types of federal student loans offered by the US Department of Education. The main difference lies in how the interest on these loans accrues. Subsidized loans are need-based and available to undergraduate students. The government pays the interest on these loans while the borrower is in school, during grace periods, and deferment periods. This means that the loan balance does not increase during these periods. In contrast, unsubsidized loans are available to both undergraduate and graduate students, and no financial need is required. Interest begins accumulating on these loans from the time they are disbursed, and borrowers are responsible for paying all of the interest accrued, even while in school or during deferment. Students can choose to either pay the interest while in school or have it capitalized, increasing the loan balance. Overall, subsidized loans are often more favorable since the government covers the interest during certain periods, reducing the overall cost of borrowing.