A subsidized loan is a loan based on financial need for which the federal government pays the interest that accrues while the borrower is in an in-school, grace period, or deferment status. For Direct Subsidized Loans first disbursed between July 1, 2012, and July 1, 2014, the borrower will be responsible for paying any interest that accrues during the grace period. If the interest is not paid during the grace period, the interest will be added to the loan’s principal balance (capitalized).