Definition
A federal student loan, awarded to undergraduates based on financial need, on which the government pays the interest while the student is enrolled at least half-time, during the grace period after leaving school, and during approved deferments. The balance at the start of repayment is exactly what was borrowed. Unsubsidized loans, by contrast, accrue interest from the day the money is disbursed.
Why it matters
Interest that someone else pays makes subsidized loans the cheapest student borrowing available, which is why they are typically used before unsubsidized or private loans. Their per-year and lifetime limits are set by the government and are lower than what many students actually need.
Example
A student borrows $5,500 in subsidized loans each year for four years at an assumed 5% rate. At graduation, after the grace period, she owes exactly $22,000. The same $22,000 borrowed unsubsidized would have accrued about $3,300 of interest over the four years and the grace period, so a classmate who did not qualify for subsidized loans starts repayment owing roughly $25,300.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.