College | May 18, 2023 | Ashley Boucher
Federal Stafford loans are a common way to help pay for college. Almost 44 million borrowers have taken out one or more federal student loans and these loans make up 93% of student debt.footnote 1
Stafford loans (now known as “direct” loans) are federal student loans made by the government. Borrowers get the loans from the U.S. Department of Education.
Generally speaking, Stafford loans are among the easiest to obtain because, unlike private student loans, the government doesn’t assess your credit or ability to repay them (which, for young people who are just entering the world of financial decision making, can be a positive thing). The other side of this coin, though? The government has no knowledge or insight into whether you’ll be able to successfully manage these loans—so make sure to borrow responsibly, taking only what you need to cover your college costs.
If you’re looking into Stafford loans, it’s critical to know the two different types: Subsidized and unsubsidized.
Other important terms to understand:
To be eligible for a Stafford loan, a borrower is required to:
To be considered for a Stafford loan (and other federal financial aid), students must submit a Free Application for Federal Student Aid (FAFSA®) every year. This is the single most important thing you can do to qualify for some of the $150 billion in financial aid offered, including scholarships, grants, work-study, and federal loans. Note: The opening date for the 2024-25 FAFSA® (which normally would have been October 1), has been pushed back to December by the Department of Education. This is a one-year exception only.
For both subsidized and unsubsidized loans (and other financial aid), the borrower’s school determines the amount that can be borrowed based on the cost of attendance and other financial aid a student receives.
After you’ve maxed out your federal student loans, and taken advantage of scholarships, grants, and work-study, you might want to consider a private student loan. These are issued by banks and financial institutions, have different interest rates and repayment terms, but can be another way to help cover any gaps in financing.
For loans first disbursed on or after July 1, 2022, and before July 1, 2023, both subsidized and unsubsidized Stafford loans for undergraduates) have a 4.99% interest rate. Graduate students will receive a 6.54% interest rate.footnote 2 These are fixed Stafford loan interest rates that won’t change for the life of the loan.
Federal student loan interest rates reset for new loans on July 1 each year.
In addition, for loans disbursed (sent to the school) on or after 10/1/20 and before 10/1/23, there is an origination fee for Stafford loans of 1.057%.footnote 2 This covers the cost of issuing the funds. Don’t forget to factor this cost in when considering these loans.
As mentioned, borrowers who qualify for subsidized Stafford loans must demonstrate financial need (which is shown when you file the FAFSA®). These loans also have lower borrowing limits than their unsubsidized counterparts: students can borrow up to $5,500 a year, or $23,000 total.
Here’s a breakdown of what undergraduate students can borrow, per year.footnote 3
How long you have to finish school: Make sure you’re aware of how long you take to complete a degree. You may not receive subsidized Stafford loans for more than 150% of the published length of your program. This is called the “maximum eligibility period.” If your degree program is a four-year program, for example, you’ll have six years to borrow this type of loan, even if you take longer than six years to earn your degree. Your school usually posts the length of any programs offered in their catalog, but if you’re unsure, you can call the school to ask.
Borrowers do not need to demonstrate financial need, and these loans have higher borrowing limits, (up to $7,500 a year, minus the amount of any subsidized loans for the same time period, and up to $31,000 in the borrower’s lifetime), allowing students to cover more money for direct and indirect costs related to their education.
Here’s a breakdown of what undergraduate students can borrow, per year:
Both undergrads and graduate students can take these loans out, unlike subsidized Stafford loans, which are only available to undergrads. Graduate students attending graduate or professional school also have higher borrowing limits ($20,500 annual for grad school, $138,500 lifetime, and $40,500 annual for medical school, $224,000 lifetime).
If you reach the maximum amount of borrowed funds over the course of your education, you are not eligible for additional loans. You can, however, repay some of your existing loans, and therefore fall below the aggregate loan limit. At this point, you may be able to borrow again.
The standard repayment period for Stafford loans is 10 years, but you can secure a longer repayment term if you have more than $30,000 in federal student loans. Payments are due after you graduate, leave school, or change your enrollment status to less than half-time.
Other popular repayment plans, intended to assist you if you’re unable to keep up with your monthly payments, include:
Additionally, if a borrower is struggling to make payments due to circumstantial hardship, like the loss of a job, they may qualify for loan deferment or forbearance for a certain amount of time. This means they can temporarily stop making federal student loan payments or reduce the amount they pay, but there are drawbacks. If your loan is unsubsidized, the interest will continue to accrue at its regular rate and be added to the total loan amount.
Funds from your subsidized or unsubsidized loan will be disbursed (sent) to your college to be used for tuition and fees, room and board, and other applicable costs, like technology or equipment related to your program of study.
If you’re a first-year undergraduate student and this is the first time you’ve borrowed a Stafford loan, you may have to wait 30 days after your enrollment period begins before your first disbursement. Your school’s financial aid office can advise you on whether this is the standard procedure there.
After the loan is received, you’ll be contacted by the loan servicer. If there are leftover funds, the balance will be refunded to you by check, cash, debit card, or electronic funds transfer (EFT). Your refund has to be used to pay for education expenses, whether direct or indirect, like textbooks and supplies. Alternatively, and perhaps most recommended, you could give any unused money back, lowering your total amount borrowed (and your monthly payments once you leave school).
1. Apply: File the Free Application for Federal Student Aid (FAFSA®) early to be in line for first-come, first-served financial aid. The 2024-25 FAFSA® will be open in December instead of October; this is a one-year exception only.
2. Figure out school costs: Knowing the cost of attendance will give you a better idea of just how much money you’ll need in savings, income, loans, or other forms of aid.
3. Compare financial aid offers: When you get your offers from every school you’ve applied to, compare them to see which is offering you the best terms.
4. Work the numbers: Figure out how much you’re eligible for in either subsidized or unsubsidized loans. If you still need more, consider a private student loan to fill in the financing ‘gap.’
When you need money for college, take advantage of all the federal Stafford loans you qualify for. They’re the lowest-interest borrowing options for school, with flexible repayment options.