What is a Stafford Loan: Everything You Need to Know

If you’ve ever taken out student loans for school, chances are you have a few Stafford Loans. Direct Stafford Loans are the most common type of federal student loan distributed to undergraduate, graduate and professional students.

What is a Stafford Loan?

First, let’s try to clear up the name of the loan. The U.S. Department of Education federal student loan program is called the William D. Ford Federal Direct Loan Program. Under this program, there are Direct Loan options offered to students.

Prior to 2010, federal student loans did not all come directly from the Department of Education. Instead, Stafford Loans began under the Federal Family Education Loan (FFEL) Program. These were loans guaranteed by the federal government. This program has been discontinued, and all federal student loans currently being dispersed are now Direct Loans.

That said, Federal Stafford Loans operate the same way as a Direct Loan. They are referred to by a few different names, including:

• Direct Loans
• Federal Direct Stafford Loans
• Direct Stafford Loans

Each of these terms refers to the same loans offered under the Direct federal student loan program. The most important thing to note about your student loans is which type of Direct Loan (or Stafford Loan) they are.

What to know about the two types of Federal Stafford Loans

There are two types of Stafford Loans. Each loan has different terms and a limit for how much you can borrow.

Subsidized Stafford Loans

Subsidized Stafford Loans, also called Direct Subsidized Loans, are the most-appealing type of loan for students. These loans are only available to undergraduate students who demonstrate financial need and are disbursed after a student files their Free Application for Federal Student Aid (FAFSA).

This kind of student loan is more appealing than others because the Department of Education pays the interest on it while you’re in school as well as during both grace and deferment periods.

Unsubsidized Stafford Loans

Unsubsidized Stafford Loans, also called Direct Unsubsidized Loans, are available to undergraduate, graduate and professional students. Unlike subsidized loans, you don’t have to demonstrate financial need to receive unsubsidized loans.

You must pay the interest on this type of student loan during all periods. If you choose not to pay the interest while in school or during grace or deferment periods, the interest will continue to accrue. Once you exit one of these periods, the unpaid interest will capitalize (i.e., be added to the principal balance of your loan).

Limits on Federal Stafford Loans

With both Subsidized and Unsubsidized Stafford Loans, you’re limited on the amount you can borrow and how many years you can take them out.

How much you can borrow

Your school will determine the loans you can receive based on the information you provide on your FAFSA. That said, you have an annual limit to how much you can borrow and an aggregate (overall) limit to how much you can borrow.

The annual limits are determined by what year you are in school and whether you’re an independent or dependent student.

• Dependent students are typically those in an undergraduate program or under the age of 24.
• Independent students typically are those in a graduate program. However, independent students can also be those who are over 24 years old, married, supporting other individuals, an emancipated minor, homeless, an orphan, or a veteran.

Review the chart provided on the Federal Student Aid website to see what your current annual limits are based on your student status.

Your total aggregate limits are important to keep in mind as you plan for your overall program cost. In total, the aggregate federal Stafford Loan limits are:

•  $31,000 for dependent students. The max amount of this total that can be subsidized loans is $23,000.
• $57,500 for undergraduate independent students.  The same limit applies here for subsidized loans — no more than $23,000 can be taken out for undergraduates.
• $138,500 for graduate or professional independent students. No more than $65,500 of this amount may be in subsidized loans.

It’s important to note that the graduate aggregate limit includes all federal loans received for undergraduate study.

How long can you take out Federal Stafford Loans?

There’s a time limit for how long you can receive Federal Stafford Loans, which applies to all first-time borrowers after July 1, 2013. This time limit only pertains to Subsidized loans and is measured in academic years, not calendar years.

You may not receive Subsidized loans for more than 150% percent of the published length of your program. You can find this information for your program in the school’s catalog or on the school's website. This is referred to as the “maximum eligibility period.”

Are Federal Stafford Loans the best student loans?

Generally, Federal Stafford loans, especially subsidized loans, are the best options for students. There are a few exceptions to this rule, so you’ll want to weigh all of your options when deciding on a student loan. You should compare these loans to Direct PLUS Loans and private student loans as well.

Low interest rates

One reason to take out Federal Stafford Loans above other types of student loans is the low interest rate.

As of July 1, 2019, the interest rate for subsidized and unsubsidized loans for undergraduates is 5.05%. The interest rate for unsubsidized loans for graduate or professional students is 6.60%. These interest rates are far better than PLUS Loans.

Private student loan interest rates are determined by your credit score, which makes it possible to get a lower interest rate than a Stafford Loan while in school. This may be something to look into if you can start paying the loan back right away and don’t need a cosigner.

Flexible repayment and forgiveness eligibility

Another reason Stafford Loans tend to be a better option is the numerous borrower protections. With all federal student loans, you’re given a grace period. This is a chunk of time after graduation where you don’t need to make payments.

For Stafford Loans, you have a six-month grace period. You have to start repaying private student loans immediately after they’re disbursed, making federal student loans easier to manage while in school.

Federal student loans, in general, offer you more-flexible options for repayment after graduation. PLUS Loans also offer repayment alternatives, while private student loans don’t have this guarantee.

Lastly, Stafford Loans qualify for federal student loan forgiveness programs while private student loans don’t. Keeping these options open for your repayment period after graduation is a smart step.

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How should you pay back Federal Stafford Loans?

You are not required to make any payments on your Stafford Loans while in school. As mentioned above, you also have a six-month grace period. There are important steps for repayment that you can take during both of these periods.

Before you graduate

You may want to consider paying your loan interest while in school. If you have subsidized student loans, the government will pay your interest. With unsubsidized student loans, on the other hand, interest will accumulate while you’re in school. If you don’t pay this interest, it will capitalize.

Capitalized interest is something you want to try and avoid. Capitalization is when unpaid interest is added to the total principal balance of your student loan. This means you’re paying interest on interest, and it will cost you more than you originally borrowed.

Capitalization occurs when you exit the grace period and enter repayment. Paying off interest while in school is a good strategy that will help you pay back your loans after graduation.

After you graduate

Your first step after graduation is to log into the National Student Loan Data System (NSLDS) to review all of your student loans. You’ll want to find your student loan servicer and make sure you’re in communication about repayment so you don’t miss a student loan payment or let your student loans default.

During the grace period, it’s a good idea to look into your repayment plan options and if you qualify for any student loan forgiveness. There are many routes you can take depending on your career, expected income and family size.

The bottom line? Don’t miss a payment and get a plan in place.

How do you know if Stafford Loans are right for you?

Stafford Loans are a great option for many students to pay for school, but they’re still loans that you’ll be paying back. Don’t forget to apply for scholarships and accepting any grants before taking on a student loan.

Every situation is different, but generally, you take out federal student loans before private student loans. Accept the Subsidized Stafford Loans before the Unsubsidized Stafford Loans if you have this option. Graduate students who have reached their aggregate limit for Stafford Loans should research both PLUS Loans and private loans, as they could get a better rate outside of a PLUS Loan.

If you need help weighing all of your options or creating a plan for paying back your student loans, the team at Student Loan Planner® is here for just that. Schedule a consultation with one of our professionals today.

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