Everything You Need to Know About Federal Stafford Loans

A Federal Stafford Loan is a student loan originated by the government and available to undergraduate, graduate, and professional students.

Federal Stafford Loans have fixed interest rates and can be subsidized or unsubsidized. Although the government pays interest on subsidized loans while students are in school or while loans are in deferment after graduation, students are responsible for paying interest on unsubsidized loans, and any unpaid interest is added to the loan balance.

There’s an origination fee for Federal Stafford Loans, but borrowers benefit from many protections, including income-driven repayment plans and Public Service Loan Forgiveness. 

If you have federal student loans, there’s a good chance some of them are Federal Stafford Loans. After all, more than 32 million borrowers in the U.S. have at least one Stafford Loan — totaling $722.2 billion.

Here’s everything you need to know about Federal Stafford Loans, from taking them out to repaying the debt.

Understanding Federal Stafford Loans (aka Direct Loans)

Federal Stafford Loans are often called Direct Loans. Both terms refer to the same loans offered through the William D. Ford Federal Direct Loan (Direct Loan) Program.

There are two types of Stafford student loans:

  • Subsidized Stafford Loans, also called Direct Subsidized Loans
  • Unsubsidized Stafford Loans, also called Direct Unsubsidized Loans

The key difference between subsidized and unsubsidized Stafford Loans is the federal government pays (or “subsidizes”) interest on subsidized loans during select periods. With unsubsidized Loans, there’s no federal help with interest, but there are fewer limits on borrowing funds.

Federal Stafford Loans might be the simplest and most accessible loans you’ll want to research if you’re a first-time borrower. Interest rates are low, and federal student loans offer more flexible repayment options. Private student loans don’t offer income-driven repayment plans, for example.

What’s more, eligibility for Federal Stafford Loans isn’t based on credit. So even if your FICO score is less than stellar, every approved borrower receives the same limits, rates, and terms.

However, you’ll need to meet other eligibility requirements before you can borrow with Stafford student loans. For instance:

  • You must be enrolled at least half-time at a school that participates in the Direct Loan Program.
  • You also must be enrolled in a program that leads to a degree or certificate awarded by the school.

Direct Subsidized Loans

This type of Federal Stafford Loan is available to low-income undergraduate students who demonstrate financial need. Currently, there are no subsidized student loans for graduate students.

With subsidized Stafford student loans, you’re responsible for paying your principal balance and interest. But the U.S. Department of Education will take care of your interest if you’re still in school, during your post-graduation grace period, and during deferment.

The federal student loan limits are lower for subsidized Stafford student loans. Therefore, students can borrow only as much as $5,500 a year — and up to $23,500 total — through this type of loan.

You also will be eligible to borrow through Subsidized Loans for only 150 percent of the length of your degree program. That’s three years for a typical associate’s degree and six years for a bachelor’s degree.

Direct Unsubsidized Loans

Undergraduate and graduate students can take out these Federal Stafford Loans; they aren’t limited to low-income students.

Unlike subsidized student loans, you’re responsible for all the interest on unsubsidized student loans — even during times of loan deferment or forbearance.

The good news is the 150 percent time limit doesn’t apply to these unsubsidized Federal Stafford Loans. That means students can continue to fund college costs with these unsubsidized Stafford student loans if their degrees take longer to complete.

Additionally, loan limits on unsubsidized loans are higher, so students can use them to cover more of their costs.

How are Federal Stafford Loans disbursed?

If you’re eligible for a Federal Stafford Loan, it should be listed on your financial aid award letter as a form of financial aid you can claim. You will need to complete entrance counseling and submit a Master Promissory Note (MPN) to apply for the loan.

Then, the Federal Student Aid Office will process your MPN and disburse loan funds through your college’s financial aid office. From there, the office will apply funds to your outstanding charges in the order of tuition and fees, room and board, and other school costs.

Federal Stafford Loan interest rates

Your Federal Stafford Loan interest rate will vary according to the loan type and degree you’re seeking.

According to the U.S. Department of Education, loans disbursed on or after July 1, 2017, and before July 1, 2018, have the following interest rates:

  • Direct Subsidized Loans for undergraduates: 4.45% APR
  • Direct Unsubsidized Loans for undergraduates: 4.45% APR
  • Direct Unsubsidized Loans for students in graduate or professional programs: 6.00% APR

Also, don’t forget about federal student loan fees. Federal Stafford Loans include a 1.069 percent fee when they are disbursed before Oct. 1, 2017, and a 1.066 percent fee when they are disbursed on or after that date.

Federal Stafford Loans also qualify for most repayment plans — including standard, extended, graduated, and income-driven — which can run from 10 years up to 25 years.

Not all student loans are created equal

Stafford student loans can be a smart way to finance your college education. But consider them alongside other student loan options — such as PLUS or private student loans — to find the best fit for you.

Your school’s financial aid office also can be a great resource, offering personalized guidance to help you decide on the best way to borrow with federal student loans.

And if you’re having trouble repaying your loans, get in touch with your loan servicer ASAP. It can guide you toward options for pausing or reducing your payments so you don’t fall behind.

Paul Sisolak contributed to this article.

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