The Direct Stafford Loan is the biggest source of low-interest loans for college-bound students who demonstrate financial need. In fact, nearly all students are eligible to receive Stafford loans regardless of credit.
These loans come in two flavors: either subsidized or unsubsidized.
“Subsidized” means that the interest is paid by the government while the student is in college. For unsubsidized loan, you are responsible for all of the interest that accrues while you are still in school.
- Direct Subsidized Loans
You must exhibit financial need to receive a subsidized loan. The U.S. Department of Education will pay (subsidize) the interest that accrues on your loan while you’re in school. Repayment begins six (6) months after you graduate. - Direct Unsubsidized Loans
Unsubsidized loan is not awarded based on financial need, however, you are responsible for paying the interest that accrues on your loan; although you can have the payments deferred until after graduation.
According to FinAid, about 2/3 of subsidized Stafford loans are awarded to students with family AGI of under $50,000, 1/4 to students with family AGI of $50,000 to $100,000, and a little less than 10% to students with family AGI over $100,000.
Eligibility
To be eligible for Stafford loans, you must meet a few requirements:
- A U.S. citizen or eligible non-citizen
- Enrolled at least half-time in a degree or certificate program
- Currently not in default of any of your existing federal loans
To apply for a Stafford Loan, you must submit the Free Application for Federal Student Aid (FAFSA). Even though the unsubsidized Stafford Loan is available to all students regardless of financial need, you must still submit the FAFSA to be eligible.
If you’re eligible, you will shortly after receive an award letter with the instructions on the next steps in the process.
When you receive a Stafford Loan for the first time, you must complete a Master Promissory Note (MPN) – a legal document in which you promise to repay your loan and any accrued interest and fees.
Borrowing Limit
| Year | Dependent Undergraduate Student (except students whose parents are unable to obtain PLUS Loans) | Independent Undergraduate Student (and dependent students whose parents are unable to obtain PLUS Loans) | Graduate and Professional Degree Student |
| Freshman | $5,500—
No more than $3,500 of this amount may be in subsidized loans. | $9,500—No more than $3,500 of this amount may be in subsidized loans. | $20,500—No more than $8,500 of this amount may be in subsidized loans. |
| Sophomore | $6,500—No more than $4,500 of this amount may be in subsidized loans. | $10,500—No more than $4,500 of this amount may be in subsidized loans. | |
| Junior, Senior | $7,500—No more than $5,500 of this amount may be in subsidized loans. | $12,500—No more than $5,500 of this amount may be in subsidized loans. | |
| Maximum Total Debt | $31,000—No more than $23,000 of this amount may be in subsidized loans. | $57,500—No more than $23,000 of this amount may be in subsidized loans. | $138,500—No more than $65,500 of this amount may be in subsidized loans. The graduate debt limit includes Stafford Loans received for undergraduate study. |
Source: http://www.studentaid.ed.gov/
Interest Rate
For the 2011–2012 school year, the interest rate for subsidized undergraduate Stafford loans is 3.4%.1 The interest rate for all other Stafford loans is fixed at 6.8% for all borrowers.
In addition, there is a loan origination fee of 1% on all Direct Subsidized and Unsubsidized Loans.
Update: The new legislation eliminated the interest subsidy during the six-month grace period. You will still have a 6-month window to begin repaying your loans, but interest will begin to accumulate once you’ve graduated or is no longer enrolled.
Income-Based Repayment Plan
Income-Based Repayment (IBR) Plan is a new way designed to make repaying education loans easier for students who are experiencing financial difficulty.
It does this by capping the monthly payments at 15% of the borrower’s discretionary income.2 For most eligible borrowers, IBR loan payments will be less than 10% of their income or even less for those with with low earnings.
The maximum repayment period is 25 years, after which any remaining debt will be discharged or forgiven. For more information, please refer to the FinAid Q&A on IBR and IBRinfo.org.
References- The interest rate is scheduled to return to 6.8% in 2012-13. [↩]
- Discretionary income is the difference between adjusted gross income (AGI) and 150% of the federal poverty line that corresponds to your family size and the state in which you reside. [↩]