What is the difference between subsidized an unsubsidized loans?
A subsidy in a loan is backing. Student loans for example are subsidized in that the Federal Gov't guarantees the bank payment if the borrower defaults. So the risk is then transfered from the lender to the subsidiser, in this case the Federal Gov't. Unfortunately this can cause a great deal of inflation. College's have no incentive to lower tuition in this example because they know people without collateral or income can still borrow vast amounts of money. So in return they know they can charge more than the market would ordinarily bare. So they do.
Subsidized loans are awarded on the basis of financial need. You won't be charged any interest before you begin repaying the loan because the federal government subsidizes the interest during this time.
Unsubsidized loans charge interest from the time the money is first disbursed until it is paid in full. The interest is capitalized, meaning that you pay interest on any interest that has already accrued. One way to minimize how much interest accrues is to pay the interest as it accumulates.
Subsidized loan is free money. In most cases, you pay back the principal only (partial or in full). The interest of the loan or part of the principal is assumed either by the government or a private institution.
Unsubsidized or non-subsidized loan is a loan you have to repay everything - principal, interests and fees.
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