When the government pays the principle and/or interest on a federal loan, on behalf of the borrower, the government refers to this as a subsidy. The loan is a subsidized loan. The government does not make such payments for unsubsidized loans. The most common type of government subsidized loans are student loans, through the U.S. Department of Education and the William D. Ford Federal Direct Loan Program. The U.S. Department of Agriculture, or USDA, also offers subsidized loans through its Rural Development Direct Loan Program.
Subsidized Student Loans
If you are attending at least six credit hours of classes and have a subsidized loan, you do not pay accrued interest. During this time, the government makes the interest payments for the loan on your behalf. Interest on these loans begins to accrue after you graduate, when your enrollment drops below six credit hours or when you leave the school. Six months later, you will have to begin making payments on your subsidized loans. These payments include both principal and interest.
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Unsubsidized Student Loans
Interest begins accruing on unsubsidized student loans when the U.S. Department of Education sends the loan money to your school. It continues to accrue, while you are attending at least six credit hours of classes. The government does not make interest payments for you, while you are attending school. However, you are not required to make interest or principal payments for unsubsidized loans until six months after your enrollment status drops below six credit hours, your graduation or leaving the school. The Department of Education will add the accrued interest to the principal balance of your loan.
Subsidized USDA Loans
The USDA's Homeownership Direct Loan Program is a subsidized home-loan program promoting home ownership for low to moderate income families, living in rural areas of the United States. Mortgages through the Homeownership Direct Loan Program are eligible for a mortgage payment subsidy from the federal government. This means that the government will pay part of the interest portion of the mortgage payment to make it more affordable. The lender for Homeownership Direct Loans is the USDA Rural Housing Service, and the USDA Rural Development services the loans.
Guarantees Versus Subsidies
Other loans, such as those offered by the Federal Housing Administration, the U.S. Department of Housing and Urban Development, and the U.S. Veteran's Administration, are not subsidized loans. The government does not subsidize or pay any portion of the costs of these loans. FHA, HUD and VA loans are examples of government guaranteed loans. This means the government guarantees that the lender will receive a portion of the outstanding loan amount should the borrower default on the loan.