What's the difference between subsidized and unsubsidized federal student loans?

Both are federal Direct Loans for students, but the interest treatment differs. On a subsidized loan, available only to undergraduates with demonstrated financial need, the government pays the interest while you're in school at least half-time and during the grace and deferment periods, so the balance doesn't grow during those windows. On an unsubsidized loan, open to undergrad and graduate students regardless of need, interest accrues from the day the money is disbursed; if you don't pay it during school, it capitalizes onto your balance. Both share the same fixed rate set annually by Congress. Always exhaust subsidized loans first, then unsubsidized, before touching pricier Parent PLUS or private loans. The distinction can save thousands in accrued interest over a four-year degree.