Everything You Need to Know About Federal Stafford Loans

 March 20, 2020
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A federal Stafford loan is 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.

If you have federal student loans, there’s a good chance some of them are federal Stafford loans. After all, more than 33 million borrowers in the U.S. have at least one Stafford loan — totaling $796.7 billion.

Here’s our guide to everything you need to know about federal Stafford loans, from taking them out to repaying the debt.

Understanding federal Stafford loans (a.k.a. Direct loans)
Eligibility requirements for Stafford loans
What are Direct subsidized loans?
What are Direct unsubsidized loans?
How are federal Stafford loans disbursed?
Federal Stafford loan interest rates
Not all student loans are created equal

Understanding federal Stafford loans (a.k.a. Direct loans)

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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.

But Stafford loans come with borrowing limits, so you might need even more money to pay for college. Head to our guide to learn what the borrowing limits are for federal Stafford loans.

Eligibility requirements for Stafford loans

Unlike private student loans, your eligibility for federal Stafford loans isn’t based on credit. Even if your FICO score is less than stellar (or non-existent), you’ll still qualify for Stafford loans and receive the same limits, rates and terms as other students.

Here are the main eligibility requirements you’ll need to meet to borrow Stafford student loans:

  • 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.

To access these loans, you’ll need to submit the Free Application for Federal Student Aid (FAFSA). Once the Department of Education and your school’s financial aid office have reviewed your information, you’ll see how much you can borrow in your financial aid award letter.

Note that you’re not obligated to borrow the full amount. To avoid taking on burdensome debt, try to take out the minimal amount you need to pay for school and no more.

What are Direct subsidized loans?

Subsidized loans are 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% 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.

What are Direct Unsubsidized Loans?

Any undergraduate or graduate student can take out unsubsidized 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% 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, 2018, and before July 1, 2019, have the following interest rates:

  • Direct subsidized loans for undergraduates: 5.05% APR
  • Direct unsubsidized loans for undergraduates: 5.05% APR
  • Direct unsubsidized loans for students in graduate or professional programs: 6.6% APR

Also, don’t forget about federal student loan fees. Federal Stafford loans include a 1.066% fee when they are disbursed before Oct. 1, 2018 and a 1.062% fee when they are disbursed on or after that date and before Oct. 1, 2019.

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. Since they come with relatively low, fixed interest rates, they should probably be your first pick before turning to a PLUS loan or a private student loan.

But Stafford loans come with annual and aggregate borrowing limits, meaning you might need additional money to pay for school. If that’s the case, explore your options for private student loans with low interest rates.

If you’re not sure how to proceed, your school’s financial aid office can also be a great resource, offering personalized guidance to help you decide on your 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. Your servicer can guide you toward options for pausing or reducing your payments so you don’t fall behind.

Rebecca Safier and Paul Sisolak contributed to this article.

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