For federal student loans, two of the most common types are Direct Subsidized and Direct Unsubsidized loans. The difference comes down to one thing: who pays the interest while you are in school.
Subsidized student loans:
- Available to undergraduate students with demonstrated financial need.
- The government pays the interest while you are enrolled at least half-time, during the grace period after you leave school, and during periods of deferment.
- This makes them the less expensive option, because interest is not piling up during school.
Unsubsidized student loans:
- Available to undergraduate and graduate students — financial need is not required.
- Interest accrues from the day the loan is disbursed, including while you are in school.
- If you do not pay that interest as it builds, it is added to your balance — called capitalization — so you end up paying interest on interest.
The practical takeaway: subsidized loans are cheaper because of the in-school interest subsidy. If you are offered both, it generally makes sense to accept subsidized loans first. Paying interest on an unsubsidized loan while still in school, even partially, reduces what capitalizes later.
These rules apply to federal student loans. For RMO's own student lending and refinancing, see RMO student loan options — terms are disclosed before you borrow.