What are Federal Stafford Loans – How to Apply and How They Work

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Christy Rakoczy

By Christy Rakoczy

March 19, 2020

A Federal Stafford Loan is a student loan issued by the Department of Education. In fact, there are two kinds of federal Stafford Loans: Subsidized and Unsubsidized Loans.

While the two types have some important differences regarding how interest works and who can qualify for them, each is offered through the William D. Ford Direct Loan Program. As a result, Federal Stafford Loans are often called Direct Loans.

If you’re going to attend a college or university and you need to borrow to do it, you should start first with Federal Stafford Loans. Only after exhausting your eligibility for them should you consider other types of student loans, including private loans.

How do Federal Stafford Loans Work?

Federal Stafford Loans have a few key features that make them especially attractive to borrowers looking to fund their education by financing it.

Low interest rates: Stafford Loans have low fixed interest rates and origination fees. No matter what your credit or income is, everyone will qualify for the same rate as others borrowing during the same academic year. You don’t have to shop around for Stafford Loans because of this. In fact, you can’t really shop around at all since Stafford Loans are made by the Department of Education.

While there are different loan servicers that process payments and handle customer service related to Stafford Loans, the terms of your loan are always set by federal law so there should be no variation in payment obligations or benefits from one servicer to another.

Good credit isn’t required: Stafford Loans are attractive for other reasons too, besides the low fixed interest rate and origination fees. For one thing, good credit isn’t needed to qualify for them. And since these loans are geared to young students going to school, you do not have to show you’re earning a steady paycheck to get one.

Federal loan benefits: Stafford Loan borrowers also get the full measure of federal student loan protections, including:

What are the Different Types of Federal Stafford Loans?

The type types of Stafford Loans include the following: 

  • Subsidized Stafford Loans: These are only available for undergraduates. Students must show financial need to qualify for them, after considering both the student’s income as well as family financial resources unless the student is independent.
  • Unsubsidized Stafford Loans: Both undergraduate students and graduate students can take out one of these loans from the Department of Education, even without demonstrated financial need.

Subsidized Stafford Loans can be far more affordable to repay than Unsubsidized Stafford Loans. That’s because, as the name suggests, the government subsidizes interest on them. You don’t have interest accruing on your subsidized loans while you’re in school, during the six-months after you graduate when you have a grace period before payment is due, or if you can qualify to have payments deferred for an eligible reason after graduation.

When the government subsidizes interest, your principal balance doesn’t get bigger even if you aren’t making payments. This makes repayment much more affordable, particularly because you avoid capitalization that occurs when unpaid interest accruing on your student loan is added onto your principal. If this capitalization happens, as it does on Unsubsidized Stafford Loans and private student loans if payments don’t cover interest, you end up paying interest on interest.


How Can You Apply for a Federal Stafford Loan?

If you are interested in applying for a Federal Stafford Loan, you’ll need to submit your Free Application for Federal Student Aid (FAFSA). This application becomes available on October 1st each year. While you can submit it through June 30, it’s best to send it in as soon as possible because there are some types of federal aid that are limited.

You’ll provide financial details on the FAFSA that are necessary to determine if you can qualify for Subsidized and Unsubsidized Stafford loans. You’ll find out if you qualified, and how much aid you’re eligible for when you receive a financial aid award letter from colleges you applied to attend.

Remember, always max out Stafford Loans before taking on other kinds of debt as these loans have the best borrower protections and terms for most student loan borrowers. Always keep in mind how to borrow student loans responsibly, too. 

A good place to start:

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