The Stafford Student Loan program, a critical component of government financial aid, has played an important role in providing critical financial help to students pursuing their academic goals. In this post, we will look at the Stafford Student Loan program, learning about its important features, benefits, and the invaluable role it plays in making higher education more accessible to students.
Understanding Stafford Student Loan
The Stafford Student Loan program is a crucial part of the William D. Ford Federal Direct Loan Program, which is administered by the U.S. Department of Education. Stafford Loans are designed to assist undergraduate, graduate, and professional students in financing their education. These loans are one of the most common forms of federal student loans and have been a lifeline for millions of students seeking affordable ways to fund their college education.
Types of Stafford Student Loans
There are two types of Stafford Student Loans available to eligible students:
- Direct Subsidized Loans: These loans are available to undergraduate students who demonstrate financial need based on the information provided in the Free Application for Federal Student Aid (FAFSA). The government pays the interest on these loans while the student is in school, during the six-month grace period after graduation, and during authorized deferment periods.
- Direct Unsubsidized Loans: These loans are available to undergraduate, graduate, and professional students, regardless of financial need. Unlike subsidized loans, the borrower is responsible for paying all the interest, even while in school. Students have the option to defer the interest payments while they are in school, but it will be capitalized (added to the principal balance) when repayment begins.
Key Features and Benefits
The Stafford Student Loan program offers several advantages that make it a preferred choice for students seeking financial aid:
- Competitive Interest Rates: Stafford Loans typically come with competitive fixed interest rates, providing borrowers with stability and predictability in their repayment plans.
- Accessible to Most Borrowers: Stafford Loans do not require a credit check for most borrowers, making them accessible to students without a well-established credit history.
- Grace Period: After graduating, leaving school, or dropping below half-time enrollment, borrowers are granted a grace period of six months before they are required to start making loan payments. This offers borrowers time to find employment and get settled before entering repayment.
- Flexible Repayment Options: Stafford Loan borrowers have the option to choose from various repayment plans, including income-driven plans that base monthly payments on the borrower’s income.
- Loan Forgiveness Programs: Borrowers working in public service or specific professions may be eligible for loan forgiveness programs, offering relief from a portion of their loan balance.
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 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, and have different interest rates and repayment terms, but can be another way to help cover any gaps in financing.
How Does Stafford Loan Works?
Federally guaranteed student loans can be either subsidized (subsidized Stafford loans or direct subsidized loans), which means the federal government pays the interest during certain periods, or unsubsidized (unsubsidized Stafford loans or direct unsubsidized loans).
Direct subsidized loans are only available to undergraduates with demonstrated financial need, whereas both undergraduate and graduate students can take out direct unsubsidized loans and financial need is not a factor. Depending on their circumstances, students may borrow larger amounts, but the maximum amounts that may be subsidized are $3,500 per year for freshmen, $4,500 per year for sophomores, $5,500 per year for juniors, and $5,500 per year for seniors or fifth-year students. The student’s dependency status also affects how much they can borrow.3
Stafford loans, now called direct loans, provide low-cost, federally guaranteed financing for students attending college at least half-time.
Students must first be accepted into a college or university accredited to accept federal loans and complete the Free Application for Federal Student Aid (FAFSA) prior to applying for the loan. In order to use any federal loan to pay for your education, you must be enrolled in a program offered by an accredited school.4 Search this site to see whether the school you are considering is accredited for federal loans.
Interest rates on Stafford loans are usually lower than those on private loans, there is no credit check for most federal student loans, and repayment doesn’t begin until after a student leaves college or drops below half-time
What’s the current Stafford loan interest rate?
For loans first disbursed both subsidized and unsubsidized Stafford loans for undergraduates) have a 4.99% interest rate. Graduate students will receive a 6.54% 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.
In addition, for loans disbursed (sent to the school), there is an origination fee for Stafford loans of 1.057%. 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?
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.
- 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 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:
- 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 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 the 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: Graduated repayment starts 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 at its regular rate and 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 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.
Applying for Stafford Student Loans
To apply for Stafford Student Loans, students must complete the Free Application for Federal Student Aid (FAFSA). The FAFSA gathers information about the student’s financial situation, which is used to determine eligibility for federal student aid programs, including the Stafford Loan.
The Stafford Student Loan program has been an indispensable resource for students striving to attain higher education. With competitive interest rates, grace periods, and flexible repayment options, Stafford Loans ease the financial burden for countless students pursuing their academic dreams. By providing essential financial support, this program ensures that students can focus on their studies and make the most of their educational journey.
Thanks to the Stafford Student Loan program, education becomes more accessible and inclusive, fostering a generation of empowered individuals ready to make a positive impact on the world.