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Everything You Need to Know About Federal Stafford Loans

College • January 06, 2020 • Ashley Boucher


What you’ll learn

  • Learn what a Stafford Loan is and how they work
  • Learn about Federal Stafford Loan interest rates and how they work
  • Learn what benefits and protections borrowers receive from Stafford Loans
  • Learn how to apply for a Federal Stafford Loan


Everything You Need to Know About Federal Stafford Loans

What is a Stafford Loan?

Federal Stafford loans, sometimes called Direct Loans, (and short-handed for subsidized and unsubsidized loans, or even sub and unsub) are a common way to help pay for college. According the Department of Education, more than 33 million borrowers in the United States have one (or more) of these loans.

Stafford Loans are federal loans made by the government, meaning you’re borrowing directly from the U.S. Department of Education. That’s who you’ll repay when it’s time, too. Today, 92% of all student loans are made by the federal government. The government also uses several “student loan servicers” to handle the customer service and collections of its loans. (Private student loans have different interest rates and repayment terms, but can be another way to help cover any gaps in financing after you pursue scholarships, grants, and federal financial aid).

If you’re looking into Stafford Loans, it’s critical to know one thing – there are two different types of Stafford Loans (again, sometimes called Direct Loans).

  • Subsidized Stafford Loan (available only to undergraduates)
  • Unsubsidized Stafford Loan (available to undergraduates and graduate students)

To further understand the world of Stafford Loans, it’s best to begin with a basic knowledge of the key terms:

  • Subsidized Loan: Offered to undergrads who demonstrate financial need. Interest begins to accrue after the six-month grace period (see below) and throughout the repayment period. The federal government is responsible for paying the interest while you’re in school or during periods of deferment (when you aren’t required to make payments).
  • Unsubsidized Loan: Offered to undergrads and graduate students. These loans don’t require borrowers to demonstrate financial need. Interest accrues while the student is enrolled in school, and students are responsible for paying it.
  • Grace period: A set length of time (usually six months) after a student leaves school (graduates or otherwise) in which they are not required to make payments on their student loans.
  • Origination Fee: A fee, determined by the U.S. Department of Education, that is deducted from loans from the amount borrowed.
  • Annual Loan Amount: A limit on the amount of subsidized and unsubsidized loans a student may borrow in any year, set by the U.S. Department of Education.
  • Cumulative Loan Amount: The aggregate amount of subsidized and unsubsidized loans a student may borrow in their lifetime.

Who is eligible?

Generally speaking, these 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.

Because Stafford Loans are federal loans, they have different eligibility than private student loans (administered through a private lender, like a bank or credit union).

Most students who qualify for aid are eligible for Stafford Loans. To be eligible, a borrower is required to:

  • Be a U.S. citizen, national, or eligible non-citizen
  • Be enrolled at least half-time in an eligible degree or certificate-granting program
  • Have received a high school diploma or equivalent (like the GED)
  • Not in default on any existing federal student loans
  • Meet general eligibility requirements for federal student aid

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.

What is the Stafford Loan Interest Rate & How do Stafford Loans Work?

The key difference between the two types of Federal Stafford Loans, aside from eligibility and loan limits, is how interest is handled.

  • Interest on a subsidized Stafford loan is paid by the government while students are in school or while loans are in deferment.
  • Interest on an unsubsidized Stafford loan is paid by the student and any unpaid interest is added to the loan balance.

Undergrads who take out loans for the 2019-2020 school year will receive a 4.53% interest rate. Graduate students will receive a 6.08% interest rate. 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.

(No matter which loan you choose, it’s important to know that interest on Stafford Loans don’t work the same way interest does for a credit card or mortgage, because Stafford Loans are daily interest loans. This means interest accumulates each day. For more information about interest capitalization for Stafford Loans, visit www.studentaid.ed.gov.)

Don’t forget: Federal Stafford Loans have an origination fee of 1.062% (for Academic Year 2019-2020), so factor this cost in when considering these loans. Origination fees are applied when the funds from your loan are disbursed. This covers the cost of issuing the funds. Typically, an origination fee will cost undergraduates about $150 for every $10,000 borrowed.

  • Example: If you borrow $5,000 in a subsidized Stafford Loan, you’ll receive less than that- $4,946.55 to be exact. The origination fee, in this case, $53.45, comes out of your funds.

This is important because if you apply for $5,000 and need exactly $5,000, you’ll be surprised when you’re falling a little short. It might be smart to ask for a little more (again, estimate $150 for every 10,000 borrowed). This isn’t always the right call, though, as borrowing more has an impact on your repayment. More money borrowed = more interest accrued and higher payments. Can you afford it? Plan to borrow no more than your expected salary upon graduation. Find more tips about planning with a College Planning Calculator.

Other Key Differences – Borrowing Limits and Time Limits

As mentioned, borrowers who qualify for Subsidized Stafford Loans must demonstrate financial need (which is demonstrated by filing the Free Application for Federal Student Aid, or 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. (Both loan types have borrowing limits, like many federal loans do. That’s why private student loans are good options for families looking to cover any remaining costs.)

Here’s a breakdown of what undergraduate students can borrow, per year, in subsidized Stafford Loans:

  • Up to $3,500 for their first year
  • Up to $4,500 for their second year
  • Up to $5,500 for their third year and beyond
  • A maximum of $23,000 total

Make sure you’re being mindful 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 4-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.

Unsubsidized Stafford Loans don’t have the same rules regarding eligibility, so students who take longer than six years to complete a 4-year program are in the clear.

Borrowers of unsub loans 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, in unsubsidized Stafford Loans:

  • Up to $5,500 for their first year
  • Up to $6,500 for their second year
  • Up to $7,500 for their third year and beyond
  • A maximum of $31,000 total

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.

If you are a dependent student whose parents are ineligible for a Direct PLUS Loan (federal loans that graduate students and parents of undergraduates can use to help pay for college), sometimes due to adverse credit history (PLUS loans are subject to credit checks), you may be able to receive additional Stafford loans.

Benefits and Protections for Stafford Loan Borrowers

Federal student loans make up e majority of student loans today (the federal government holds approximately 92.9% of student loans), and there are specific benefits and protections allotted to a borrower, including a variety of repayment plans.

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:

  • Income-based repayment: Monthly loan payments are based on a percentage of the borrower’s income, with remaining debt forgiven after a specific number of years in repayment. The payment is based on 15 percent of discretionary income, defined as the amount by which adjusted gross income (AGI) exceeds 150 percent of the poverty line. The poverty line is based on the borrower’s family size and state of residence.
    • The math: Income-based repayment = 15% (AGI - 150% x Poverty Line) / 12
    • The easier way to look at it: For many borrowers who qualify, the payment will be less than 10 percent of their monthly income.
  • Graduated repayment: Graduated repayment starts with monthly payments that are just barely higher than interest-only repayment plans. The monthly amount you owe increases every two years. The minimum monthly payment is $25.

After the borrower leaves school, they can combine two or more federal loans into a single Direct Consolidation Loan with a single monthly payment.

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.

How to Apply for Stafford Loans

First, if you want or think you may want, a federal loan, you need to submit the Free Application for Federal Student Aid (FAFSA). The submission period opens up every year on October 1. 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.

  • Did you know? Nearly 25% of families don’t file for the FAFSA, according to How America Pays for College 2019. That means 1 in 4 families are potentially missing out on financial aid, or even free money, to pay for college. Don’t be one of those families! File, file early, and file every year.

If you qualify or are eligible specifically for a Stafford Loan, you’ll see it listed (either subsidized or unsubsidized) on your financial aid offer letter (the financial aid award package that comes from a school after you file the FAFSA).

You’ll have to submit a Master Promissory Note (MPN) and complete entrance counseling to apply for the loan. Most of the counseling is online, though some schools require first-time borrowers to complete counseling in person.

What Happens After You’re Approved for the Loan

Funds from your subsidized or unsubsidized loan will be disbursed to your college’s financial aid office 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).

Key Takeaways

  1. Have I filed the Free Application for Federal Student Aid (FAFSA)? This is the first step in qualifying for any financial aid, so before you even consider what loan type is right for you, make sure you’ve filed the FAFSA. File on or shortly after October 1 to be in line for first-come, first-served aid.
  2. What is the Cost of Attendance for the college I’m attending? Knowing how much it costs to attend will give you a better idea of just how much money you’ll need in savings, income, loans, or other forms of aid.
  3. Have I been notified (by your financial aid offer letter from your college) that I’m eligible for the subsidized Stafford Loan? This is a need-based loan, so not everyone qualifies, but if you do, use it before choosing an unsubsidized loan. The government takes care of the interest while you’re in school with the subsidized version.
  4. How much am I eligible for in either the sub or unsubsidized loan? Do I need all of it, or, do I need more? If you need more, consider private student loans to fill in the financing ‘gap’.
  5. Am I confident I will be able to pay back what I’m borrowing? If you’re unsure about how much to borrow, consider our College Planning Calculator.

Ashley is a Sallie Mae employee and a graduate of Immaculata University. A mom of two young girls, her favorite dinner topic is the Free Application for Federal Student Aid (FAFSA).


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