Question

Yun is attempting to recall the distinction between student loans that are subsidized and those that are not. At lunch, he asks his friends, and they respond with the following information. Which pal is correct?

A. Cara: Interest is paid on unsubsidized loans; it is never paid on subsidized loans.
B. Liz: With subsidized loans, you are responsible for paying the interest after you graduate from college; the government covers it during your time in school.
C. Bill: You are not required to repay subsidized loans if you do not complete your education and receive a diploma Unsubsidized loans are all due and payable.
D. Clare: The federal government provides unsubsidized loans, whereas private banks provide subsidized loans.

Answer 1

Subsidized loans are favorable for students because the government pays the interest while they are in school and during grace and deferment periods, whereas unsubsidized loans accumulate interest immediately. Grants are financial awards that don't need to be repaid, making them different from loans which do require repayment.

Step-by-step explanation:

The difference between subsidized and unsubsidized loans lies in who pays the interest on the loans during certain periods. With subsidized loans, the government covers the interest while the student is in school at least half-time, during the grace period after graduation, and during any deferment periods. This means that the loan balance does not increase with interest during these times. In contrast, unsubsidized loans accrue interest as soon as the loan is disbursed to the student, and the student is responsible for paying all the interest, although they can choose to defer the interest payments while they are in school, which would cause the interest to capitalize and add to the principal balance of the loan.

Grants, on the other hand, are typically need-based financial awards that do not need to be repaid. Students seeking financial assistance will often consider grants vs. loans; grants are preferable since they are essentially free money, whereas loans must be repaid with interest.

Liz's statement is mostly correct in pointing out that interest on subsidized loans is covered by the government during specific periods, which can be very beneficial for students who need to borrow money for college expenses. The key advantage of subsidized loans is that they can save students a significant amount of money in interest costs.