What's the Difference Between Subsidized and Unsubsidized Loans for School?

The main differences between subsidized and unsubsidized student loans concerns how interest on the loan is paid and whether the student must demonstrate financial need to be approved for the loan, according to the U.S. Department of Education. While both are federal student loans distributed through the U.S. Department of Education, subsidized loans have better terms. Direct Subsidized Loans are available to undergraduate students only. Both graduate and undergraduate students are eligible to apply for Direct Unsubsidized Loans.

To obtain a Direct Subsidized Loan, an undergraduate student must demonstrate financial need; his school determines the amount he is eligible to borrow based on that need, explains the U.S. Department of Education. Interest accrues on all federal student loans, but with a Direct Subsidized Loan, the U.S. Department of Education pays the interest while the student is enrolled in school at least half time, during the six-month grace period after the student leaves school, and during time periods when the student defers his loan payments. In cases where the Direct Subsidized Loan was distributed between July 1, 2012 and July 1, 2014, the student is responsible for paying interest during his grace period. If he chooses not to make interest payments during this time, the interest is added to the loan's principal balance.

There is no need for students to demonstrate financial need to obtain a Direct Unsubsidized Loan, states the U.S. Department of Education. The student's school determines the amount of the loan based on any other financial aid the student receives plus the cost of his attendance. The student must pay interest that accrues on a Direct Unsubsidized Loan during all periods, including while he is enrolled in school. Unpaid interest becomes part of the loan's principal balance.