A subsidized loan is a type of federal student loan available to students who can demonstrate financial need. The U.S. Department of Education pays the interest on the loan while the student is in school and during periods of deferment, such as during military service. Subsidized loans are only available to undergraduate students who demonstrate financial need. The interest rate for subsidized loans is fixed and is currently 4.99% for undergraduates.

In contrast, an unsubsidized loan is a loan for both undergraduate and graduate students that is not based on financial need. Interest is charged during in-school, deferment, and grace periods, and the borrower is responsible for the interest from the time the unsubsidized loan is disbursed until it is paid in full. The interest rate for unsubsidized loans is also fixed and is currently 4.99% for undergraduates and 6.54% for graduate and professional borrowers.

Both types of loans must be paid back with interest, but the government helps pay some interest on subsidized student loans. If a student qualifies for a subsidized loan, it is generally recommended to take that financial aid, since it will save them money. However, if a student does not qualify for a subsidized loan, they can still apply for an unsubsidized loan, which has its own benefits such as no financial need requirement and a higher loan limit.