What is a Stafford Loan?

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By Mark Kantrowitz

August 16, 2021

The Federal Stafford Loan, also known as the Federal Direct Loan, is the largest and most popular student loan program today. 

Federal Stafford Loans are low-cost loans borrowed by students to pay for their college education.

Subsidized and Unsubsidized Loans

There are two versions of the Federal Stafford Loan, subsidized and unsubsidized

The federal government pays the interest on subsidized loans during the in-school and grace periods, as well as other deferment periods, such as during an economic hardship deferment

The federal government does not pay the interest on subsidized loans during forbearance periods, nor do they pay the interest on unsubsidized loans. 

Eligibility for the subsidized Federal Stafford Loan is based on financial need, while eligibility for the unsubsidized Federal Stafford Loan does not depend on financial need. Even wealthy students can qualify for unsubsidized loans. 

See also: Complete Guide to Financial Aid and FAFSA

Interest Rates on Federal Stafford Loans

The interest rates on direct loans are fixed rates that change for new loans each July 1. The new interest rate is based on the last 10-year Treasury Note Auction in May. 

There are different interest rates for undergraduate and graduate students.

The interest rates are set according to this formula:

Degree Level

Formula

Cap

Undergraduate

10-year Treasury + 2.05%

8.25%

Graduate

10-year Treasury + 3.60%

9.50%

This table shows the most recent interest rates.

Degree Level

2020-2021

2021-2022

Undergraduate

2.75%

3.73%

Graduate

4.30%

5.28%

Loan Fees on Federal Stafford Loans

Loan fees are deducted from the loan disbursements. Borrowers may choose to have the loan fee added to the loan balance.

The loan fees are about 1.0%, the same for undergraduate and graduate students. Loan fees are changed each October 1, based on the federal budget. 

Fees are charged based on the disbursement date.

The most recent fees are shown in this table:

Date

Loan Fees

October 1, 2020 – September 30, 2022

1.057%

October 1, 2019 – September 30, 2020

1.059%

Loan Limits on Federal Stafford Loans

The Federal Stafford Loan has an annual limit and an aggregate loan limit.

The limits on subsidized loans are lower than the overall Federal Stafford Loan limits. 

Borrowers may borrow any amounts that they do not receive as subsidized Federal Stafford Loans as unsubsidized Stafford loans, up to the overall limits.

Loan limits also differ based on the borrower’s year in school and on the student’s dependency status.

The annual loan limits for subsidized Federal Stafford Loan are the same for dependent and independent students.

Grade Level

Subsidized Stafford

Annual Loan Limits

Freshman

$3,500

Sophomore

$4,500

Junior

$5,500

Senior

$5,500

Graduate Student

None

The annual loan limits for the unsubsidized Federal Stafford Loan are different for dependent and independent students.

The annual loan limits are $4,000 or $5,000 higher for independent students.

Unsubsidized Stafford

Annual Loan Limits

By Grade Level

Dependent

Students

Independent

Students

Freshman

$5,500

$9,500

Sophomore

$6,500

$10,500

Junior

$7,500

$12,500

Senior

$7,500

$12,500

Graduate Student

N/A

$20,500

The aggregate limits depend on degree level, dependency status, and whether the loans are subsidized or unsubsidized. Students who want to borrow more than the federal loan limits may want to consider a private student loan.

Aggregate Loan Limits

By Grade Level

Subsidized

Loan Limits

Overall

Loan Limits

Undergraduate (Dependent)

$23,000

$31,000

Undergraduate (Independent)

$23,000

$57,500

Graduate + Undergraduate

$65,500

$138,500

Federal Stafford Loan Eligibility

Eligibility for a Federal Stafford Loan does not depend on the borrower’s credit scores, credit history, employment, or income. 

There is no credit check. There are no cosigners on Federal Stafford Loans. 

To be eligible for federal education loans, the student must be enrolled at least half-time. The student must file the Free Application for Federal Student Aid (FAFSA) and sign a Master Promissory Note (MPN) at Studentaid.gov.

The student must also satisfy other general loan eligibility requirements for federal student aid, including citizenship status, enrollment in an eligible degree or certificate program, maintaining satisfactory academic progress, and not being in default on a federal student loan or grant overpayment.

Loan Disbursement

The funds from a Federal Stafford Loan are sent directly from the federal government to the college. 

The college financial aid office applies the loan funds to tuition and fees, plus room and board if the student is living in college housing.

Any remaining credit balance is normally “refunded” to the student within 14 days. However, federal regulations require a 30-day delay for first-time, first-year borrowers at some colleges. 

The college may also be required to split the student loan money into two disbursements. (Colleges with low cohort default rates may receive a waiver of the 30-day delay and two-disbursement requirements.)

Repayment Options

Repayment of Federal Stafford Loans begins six months after the student graduates or drops below half-time enrollment. The six month period is called a grace period.

The standard repayment term is 10 years, but you can choose an alternate repayment plan, such as extended repayment, income-driven repayment, and graduated repayment.

With income-driven repayment plans, your monthly payment is based on your income and family size, which can reduce what you pay each month. After a certain amount of payments are made (generally 20 to 25 years of payments, depending on the specific plan), the remaining balance is forgiven.

Borrowers can consolidate their federal student loans into a Federal Direct Consolidation Loan. The interest rate on a Federal Direct Consolidation Loan is the weighted average of the interest rates on the loans included in the consolidation loan, rounded up to the nearest 1/8th of a percentage point.

Student Loan Forgiveness

There are several options for forgiveness of Federal Stafford Loans. These usually involve working in a particular occupation for a period of time. 

Examples include Teacher Loan Forgiveness and Public Service Loan Forgiveness.

There are also several options for cancellation of Federal Stafford Loans. These usually involve situations in which the borrower is unable to repay the debt or not responsible for the debt.

Examples include a closed school discharge, death discharge, total and permanent disability discharge, identity theft discharge, bankruptcy discharge, unpaid refund discharge, and false certification discharge.

See also: Current State of Student Loan Forgiveness

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