The loan type that provides an interest subsidy—meaning the U.S. Department of Education pays your interest while you’re in school, during your grace period, and during deferment—is the Direct Subsidized Loan (also called a Subsidized Stafford Loan).

What “interest subsidy” means

  • With a Direct Subsidized Loan , the federal government pays (subsidizes) the interest:
    • While you are enrolled at least half-time in school.
* During your 6‑month grace period after leaving school.

* During approved deferment periods.
  • Because that interest does not get added to your balance in those periods, your principal stays lower , which reduces the total you repay over time.

How this differs from unsubsidized loans

  • Direct Unsubsidized Loans start accruing interest immediately , even while you’re in school, in grace, or in deferment.
  • If you don’t pay that interest as it accrues, it can be capitalized (added to your principal), causing your balance to grow faster.
  • Both types are federal loans, but only Direct Subsidized Loans come with the Department of Education interest subsidy described in your question.

Quick recap in plain terms

  • The answer to “which loan type provides interest subsidy meaning Department of Education pays your interest?” is:
    • Direct Subsidized Loan (a subsidized federal student loan for undergraduates with financial need).
  • Unsubsidized loans never get this benefit; you’re always responsible for all interest on those.

Information gathered from public forums or data available on the internet and portrayed here.