Everything you should know about federal Stafford loans

Federal Stafford loans—are you eligible?

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}

What is a Stafford Loan?

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.

Key terms for understanding Stafford loans

If you’re looking into Stafford loans, it’s critical to know the two different types: Subsidized and unsubsidized.

• Subsidized loan: This is offered to undergrads who demonstrate financial need as determined through the Free Application for Federal Student Aid (FAFSA^®). 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). The borrower is then responsible for the interest that begins to accrue (grow) after the six-month grace period (see below) and throughout the repayment period.
• Unsubsidized loan: This is offered to undergrads and graduate students. These loans don’t require borrowers to demonstrate financial need. The borrower is responsible for all the interest that accrues (grows), beginning when the student is enrolled in school.

Other important terms to understand:

• 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 Department of Education, which is deducted 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 (total amount) of subsidized and unsubsidized loans a student may borrow in their lifetime.
• Loan servicer: The federal government assigns an independent company to handle the billing and customer service for each federal student loan you receive.

Who is eligible for a Stafford loan?

To be eligible for a Stafford loan, 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 be in default on any existing federal student loans
• Meet general eligibility requirements for federal student aid

To be considered for a Stafford loan (and other federal financial aid), students must submit the 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.

What’s the current Stafford loan interest rate?

Federal student loan interest rates reset for new loans on July 1 each year. For loans first disbursed on or after July 1, 2023, and before July 1, 2024, both subsidized and unsubsidized Stafford loans for undergraduates have a 5.50% interest rate. Graduate students will receive a 7.05% interest rate.^{footnote 2} These are fixed Stafford loan interest rates that won’t change for the life of the loan.

In addition, for loans disbursed (sent to the school) on or after 10/1/20 and before 10/1/24, 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. 

How much can you borrow with Stafford loans?

Subsidized 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}

• 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

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 four years, 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 loans

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 increase their coverage for direct and indirect costs related to their education.

Here’s a breakdown of what undergraduate students can borrow, per year:^{footnote 3}

• 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.

Benefits and protections for Stafford loan borrowers

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 part-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.
• Graduated repayment: Federal graduated repayment plans start with monthly payments that are slightly higher than interest-only repayment plans. The monthly amount you owe increases every two years.

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 (grow) at its regular rate and will be added to the total loan amount.

What happens after you’re approved for a Stafford loan?

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).

Your Stafford loan to-do list

1. Apply: File the 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.