What's the Difference Between Subsidized and Unsubsidized Student Loans?

Subsidized Loans: Extra Help from Uncle Sam

Unlike a grant, a loan must be paid back. Students typically don't have to start repaying their federal loans while they're in school. But the interest starts mounting from the minute the student receives the loan.

The federal government subsidizes some student loans by giving students breaks on that interest. With subsidized loans, the government pays the interest while the student is in school and any other time the student doesn't have to make payments -- during grace periods and deferments for financial hardship or other reasons. So, a subsidized loan is a better deal than one that's not subsidized.

With unsubsidized loans, the student is responsible for paying the interest from day one, while in school and during any grace or deferment period. Subsidized loans are for students with financial need, and Uncle Sam helps them out further by setting an interest rate that's lower than that of unsubsidized loans.

When it comes to student loans, federal Perkins Loans are a good deal. They are all subsidized. The interest rate is fixed at 5 percent. The federal government pays the interest while the student is in school, during a nine-month grace period after school and during deferments. Perkins Loans are supposed to be paid back in 10 years [source: FinAid].

Why doesn't every student who needs financial aid take out a Perkins Loan? There are limited federal dollars for Perkins Loans, and they go to the students who show the greatest need.

Instead, many students turn to the Stafford Loan program. That's where the two kinds of loans -- subsidized and unsubsidized -- figure into the mix. The subsidized Stafford Loans are based on need. The unsubsidized Stafford Loans are not tied to need. Students usually have between 10 and 25 years to pay either type back [source: U.S Department of Education].

Subsidized Stafford Loans have an interest rate fixed at 5.6 percent for the 2009-10 school year. The rate is expected to be 4.5 percent for the 2010-11 school year [source: Stafford].The federal government pays the interest while the student is in school and during a six-month grace period after school.

For unsubsidized Stafford Loans, the interest rate is fixed at 6.8 percent -- and the student pays it all.

Without Uncle Sam's help paying the interest, are unsubsidized Stafford Loans a good deal? Read on to learn why unsubsidized loans are worth considering.