The federal government pays the interest on the subsidized loan while you are in school at half-time enrollment, during the six-month grace period, or are in an approved deferment. You are not required to make loan payments until your 6-month grace period ends.
Subsidized loan eligibility is based on "financial need". You can determine your financial need by taking the college's cost of attendance (COA) minus your expected family contribution (EFC). The information you report on your Free Application for Federal Student Aid (FAFSA) is used to calculate your EFC.
The Expected Family Contribution (EFC) is a measure of your family's financial strength and is calculated in a formula established by law. Your family's taxed and untaxed income, assets, and benefits (such as unemployment or Social Security) are all considered in the formula. Also considered are your family size and the number of family members who will attend college or career school during the year.
You, not the government, are responsible for the interest on the unsubsidized loan. The interest never stops on an unsubsidized loan until the loan has been paid in full.
You can delay interest "payments" while in school at least half-time enrollment or have an approved deferment or forbearance by your loan servicer. If you do not make interest payments while in school, the interest will accrue and be added to the amount you borrowed when your loan enters into repayment. This is called capitalization.
Example of how your interest is Capitalized
You borrow $10,000 in unsubsidized loan over a period of four years. You choose to defer paying the interest while you are in school for four years plus the six-month grace period. The interest you did not pay is known as accrued interest. After four and a half years, about $2,040 in interest will have accrued at a fixed rate of 6.8%. When you begin repayment, you'll owe $12,040 (the original $10,000 PLUS the $2,040 in accrued interest). The interest you will repay will be based on this new higher amount. The process of adding interest to the amount borrowed rather than repaying it as it accrues is called "capitalization".