The role of diffuse electron precipitation in forming subauroral polarization streams (SAPS) is investigated with the Multiscale Atmosphere-Geospace Environment (MAGE) model. Diffuse precipitation is derived from the distribution of drifting electrons calculated in MAGE. SAPS manifest themselves as a separate mesoscale flow channel in the duskside ionosphere when diffuse precipitation is implemented in MAGE, whereas it merges with the primary auroral convection when diffuse precipitation is turned off. SAPS overlap with the downward Region-2 field-aligned currents equatorward of diffuse precipitation, where poleward electric fields closing the Pedersen currents are strong due to a low conductance in the subauroral ionosphere. The Region-2 field-aligned currents extend to lower latitudes than diffuse precipitation because the ring current protons penetrate closer to the Earth than the electrons do. This study demonstrates the critical role of diffuse electron precipitation in determining SAPS location and structure.