What is a Stafford Loan?

    Stafford loans, also known as William D. Ford Federal Direct Loans, are by far the most common type of student loans with 32.8 million recipients borrowing a total of $705.3 billion in 2017.

    These loans are backed by the U.S. government, so if a student defaults, the government guarantees repayment to the lender. That is the reason Stafford loans offer lower rates than private loans.

    Here are some advantages Stafford loans have over private loans and other federal loans:
    • Fixed interest rates for the life of the loan
    • Low interest rates
    • Credit history isn’t a factor
    • You won’t have to repay the loans while in school
    • Six-month grace period starting the day you graduate or leave school
    • Flexible repayment plans that can be based on income and could include loan forgiveness programs
    All in all, Stafford loans are the safest, most affordable student loans out there, but there are a few disadvantages:
    • You must fill out FAFSA forms and demonstrate financial need to receive subsidized Stafford loans
    • Subsidized Stafford loans are not available to graduate students
    • There are strict limits on the annual and total amount you can borrow for both undergraduate and graduate students
    • A loan origination fee of 1.069% is taken immediately out of each disbursement
    •  Rates for new loans change year-to-year

    Types of Stafford Student Loans

    There are two types of Stafford loans — subsidized and unsubsidized —  and each type has different financial-need requirements and  benefits.

    Subsidized Stafford Loans

    Subsidized Stafford loans are the most desirable student loans because the government pays the interest on your loan while you’re in school, during the six-month grace period after school and during a period of deferment if you are having financial trouble after graduation.

    Other key elements of subsidized Stafford loans include:
    • Fixed interest rate of 4.45% for undergraduate students
    • Not available for graduate students
    • Loan origination fee 1.069%
    • Must demonstrate financial need through FAFSA
    • Subsidized interest while in school
    • Six-month grace period

    Unsubsidized Stafford Loans

    Unsubsidized Stafford loans accrue interest while in school, during grace periods and deferment periods. Students are not required to pay the accumulating interest during these periods, but if you choose not to pay, it will be added to the principle amount of your loan.

    • Fixed interest rate of 4.45% for undergraduate students
    • Fixed interest rate of 6% for graduate students
    • Loan origination fee 1.069%
    • No requirement to demonstrate financial need
    • Interest is capitalized while in school
    • Six-month grace period

    Stafford Loan Limits

    There are dollar-amount limits on Stafford loans based on what year of school you’re in; whether your Stafford loans are subsidized or unsubsidized and whether you are financially dependent on your parents. Subsidized Stafford Loans have stricter limits than unsubsidized. For example, a first-year dependent student can take out a total of $5,500 in Stafford loans. Subsidized loans can make up a maximum of $3,500 of this total.

    This means if you have the maximum $3,500 in a subsidized loan, you can borrow another $2,000 in an unsubsidized loan that year. If you receive a subsidized loan of only $1,000, this leaves $4,500 that you can borrow in the form of an unsubsidized loan.

    If you are financially dependent and your parents were denied a Parent PLUS loan, you are eligible for the same loan limits as an independent student.

    Stafford Loan Limits for Undergraduate Students
    YearSubsidized Loan LimitAnnual Limit for Dependent StudentsAnnual Limit for Independent Students
    Preparatory Coursework for an Undergraduate Program$2,625$2,625$8,625
    First Year$3,500$5,500$9,500
    Second Year$4,500$6,500$10,500
    Third Year and Beyond$5,500$7,500$12,500
    Preparatory Coursework for a Graduate Program$5,500$5,500$12,500
    Teacher Certification Coursework$5,500$5,500$12,500
    Total Undergraduate Limit$23,000$31,000$57,500
    Stafford Loan Limits for Graduate Students
    YearSubsidized Loan LimitTotal Annual Limit
    Graduate and Professional Students$8,500$20,500
    Medical School Students$8,500$40,500
    Total Graduate School Limit$65,500$138,500
    Total Medical School Limit$65,500$224,000

    *Effective July 1, 2012 Graduate and Professional students are no longer eligible for Subsidized Stafford loans

    **The total aggregate limit includes all federal loans received for undergraduate study

    Applying for a Stafford Loan

    Apply for a Stafford loan by completing a Free Application for Federal Student Aid (FAFSA) form. This application is also used to determine if you’ll receive a Perkins loan, another type of federal student loan.

    If you are not eligible for any federal student aid, look into private education loans to finance your education. No matter what your financial situation or credit history, you should be able to find a loan to help you pay for your own or your child’s higher education.

    Stafford Loan Disbursement

    Financial aid, including Stafford loans, is handled by your college’s financial aid office. First-time borrowers need to complete entrance counseling (informing you of your obligation to repay the loan) and sign a Master Promissory Note (agreeing to the terms and conditions).

    Financial aid is disbursed in two installments, typically at the beginning of each semester. First, the school will apply the funds to your school account balance. This covers tuition, fees, room and board and any other school charges. The remaining money is returned to you either by check or direct deposit. You probably won’t see any money until a few weeks after the semester starts, so don’t count on loans to pay for books and school supplies right away.

    Bill Fay

    Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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