The cost of college is on the rise, and for the 2011 to 2012 school year at four-year institutions, an estimated 85 percent of full-time undergraduates attending college for the first time received some form of financial aid to offset costs, per the National Center for Education Statistics (NCES). Student financial aid is available in many types, including private loans offered by banks or other financial institutions, state loans, and federal loans, where the federal government is the lender. Federal aid comes either in the form of grants, which don’t have to be paid back, or loans where the student agrees to pay the money back. One of the most common forms of government student loans offered under the William D. Ford Direct Loan Program is the Stafford Loan. Stafford Loans are popular due to their low interest rates and flexible repayment plans, as well as the fact that they are not based on credit that a young adult probably doesn’t have yet.
Subsidized Stafford loans are based on a demonstration of financial need. For a subsidized student loan, if the student is a dependent, the parents must meet financial eligibility requirements; if they are considered independent, they must meet the financial aid requirements on their own. During the borrowing period, loans accrue interest on top of the principal, or initial amount, borrowed. One of the major benefits to a subsidized Stafford Loan is that the borrower is not responsible for the interest. Instead, the government pays the interest as long as the student is in school, during the grace period and even during deferment if necessary. The grace period is the length of time after leaving school before the repayment period starts. Deferment is, as the name implies, a postponement of loan payments for any number of reasons.
The second type of Stafford Loan, the unsubsidized student loan, is not based on financial eligibility or needs. Unsubsidized loans have higher borrowing limits that are calculated on a case-by-case basis at the school’s discretion. Unsubsidized loans require that the student pay the interest that accrues while they are in school, during the grace period, and in deferment if necessary. Interest not paid during these periods of the loan will accumulate and capitalize, meaning it will be added to the principal balance of the loan. Graduate and undergraduates, as well as professional degree students, meeting eligibility requirements may qualify for unsubsidized Stafford Loans. Often, students are eligible for both subsidized and unsubsidized Stafford Loans simultaneously.
Subsidized Stafford Loans generally have lower borrowing limits than unsubsidized loans, and the amounts are set by each specific school and cannot exceed financial needs. Subsidized Stafford Loans prior to 2011 were offered to both undergraduate and graduate students; however, the Budget Control Act changed this and, since July of 2012, only undergraduate students are eligible.
Loan limits for both subsidized and unsubsidized loans are set by the federal government. There are loan limits per year and also aggregate, or the total amount you are allowed to borrow. The total loan amount you can receive annually depends on what year in school you are and whether or not you are an independent or dependent student. You may not be eligible for the full amount, and your loan amount may be less than the set loan limit. Current loan limits per year as published by the U.S. Department of Education for dependent students are:
- First year: $5,500 in unsubsidized loans, $3,500 in subsidized loans
- Second year: $6,500 in unsubsidized loans, $4,500 in subsidized loans
- Third year: $7,500 in unsubsidized loans, $5,500 in subsidized loans
- Fourth year: $7,500 in unsubsidized loans, $5,500 in subsidized loans
- Graduate or professional degree programs per year: None as all of these students are considered independent
The total or aggregate amount that you can receive as a dependent student via an unsubsidized Stafford Loan is $31,000, and up to $23,000 may be awarded in the form of a subsidized loan.
Current independent student loan limits are:
- First year: $9,500 in unsubsidized loans, $3,500 in subsidized loans
- Second year: $10,500 in unsubsidized loans, $4,500 in subsidized loans
- Third year: $12,500 in unsubsidized loans, $5,500 in subsidized loans
- Fourth year: $12,500 in unsubsidized loans, $5,500 in subsidized loans
- Graduate of professional degree programs per year: $20,500 in unsubsidized loans, no subsidized loans are offered
An independent undergraduate student can receive up to $57,500 in the form of an unsubsidized loan, with up to $23,000 in subsidized loans allowed. Graduate or professional students can borrow up to $138,500 in unsubsidized loans, not to exceed $65,500 in subsidized loan amounts.
Amounts Awarded and Loan Estimate
The amount of federal financial aid you receive in the form of a Stafford Loan is determined by your participating school and can change annually. You must reapply every year. Individual schools also determine what type of loan you will be offered, whether or not you are eligible for an unsubsidized or subsidized loan, or both. Schools make these determinations in part based on your Free Application for Federal Student Aid (FAFSA), which you need to fill out and return to your school each academic year in which you wish to apply for aid.
The school calculates the actual cost of attendance, including tuition, school fees, room and board, books, etc. They then subtract any other financial aid you may receive before determining your Stafford Loan amount. Your loan is also charged a loan origination fee by the federal government, which is subtracted from your total loan amount before it is disbursed to the school. This fee affects loans disbursed after July 1, 2010, and the rate for loans between October 1, 2014 and October 1, 2015 is 1.073 percent.
Federal Stafford Loans offer fixed interest rates, meaning that they are locked-in for the life of the loan. These rates are set each academic year by the federal government. Prior to the 2006-2007 school year, rates were variable and changed depending on what period of the loan the student was in. This is no longer the case, with fixed rates offering the borrower set, low rates that won’t fluctuate with the market. All loans made on or after July 1, 2013 are now linked to the 10-year treasury rate and added to a fixed margin, per the Bipartisan Student Loan Certainty Act of 2013. While these loans will still have fixed rates for the life of the loan, each year fixed interest rates of new loans will be determined by the current market rate; therefore, they can differ year to year.
The 2014-2015 fixed interest rates are 4.66 percent for undergraduate students and 6.21 percent for professional and graduate students. Interest rates are the same for unsubsidized and subsidized Stafford Loans. Furthermore, borrowers can deduct up to $2,500 of their interest from federal or private student loans on federal income tax returns annually, decreasing the total amount of the loan.
Time Limit for Loan
Unsubsidized Stafford Loans do not have a time limit requiring you to complete your degree or certificate program. Direct subsidized loans do have what is called a “maximum eligibility period” for first-time borrowers after July 1, 2013, however. This maximum amount of time during which you can receive subsidized loans is based on 150 percent of your current program’s published length. This means that if you attend a four-year degree program, for example, your “maximum eligibility period” would be six years, while if you are enrolled in a two-year degree program, your maximum length of time would be three years. This eligibility period can change if you change programs as well, and the subsidized loans you received for your previous program will still count toward your new eligibility timeline.
In order to be eligible for a federal Stafford Loan, you must meet certain criteria, including:
- Be a U.S. citizen, U.S. national, U.S. permanent resident, or eligible non-citizen
- Have a valid social security number
- Either be accepted for enrollment or already be attending a school participating in the Federal Direct Loan Program
- Plan to enroll or be enrolled at least half-time, generally in a program leading to a degree or certificate
- Be registered with Selective Service if you are a male over age 18
- Prove that you are qualified to receive a career school or college education either with high school diploma, GED, approved homeschool program completion, or meeting other state-established federally approved standards
- Have turned in completed FAFSA forms
- Not have any federal student loans in default or owe money on a federal student grant
- Agree to use money distributed for educational purposes only
- Maintain satisfactory academic progress as determined by your school
- Demonstrate financial need for subsidized loans
If you have any questions about your eligibility for a federal Stafford Loan, contact your school’s financial aid office.
In order to apply for any type of federal student loans, you must first fill out a FAFSA (Free Application for Federal Student Aid) or renewal FAFSA if you are a returning student. This can be done online on the Federal Student Aid website or via mail. The FAFSA will determine what type of aid you may be eligible for and how much money you will either be granted or are eligible to borrow in the form of a federal student loan. The FAFSA calculates this based on financial need and by determining an Expected Family Contribution (EFC).
FAFSA will require income information, household information, assets, and the determination of whether or not you are a dependent or independent student in order to make their decision. FAFSA is submitted to the Department of Education and results are sent directly to your school’s financial aid office. Each school sets the deadline to file your annual FAFSA, and some are as early as January 1st. Be sure to know when your school’s deadline is as you have to reapply each year to continue receiving aid.
After submitting your FAFSA, you will receive a letter detailing what type of aid you are eligible for. You will then need to contact your school’s financial aid office to accept the loan and sign any necessary paperwork. This will include a Master Promissory Note (MPN), which is often signed digitally online at StudentLoans.gov.
The MPN has all the information about your loan and its terms, and you should take care to read it carefully. The MPN is good for up to 10 years. First-time borrowers are required to attend an entrance counseling interview when obtaining federal student loans, to help you understand your responsibilities and rights as a borrower as well as to detail your options and loan terms.
How Stafford Loans Are Disbursed
Stafford Loans are typically disbursed directly to the school and used to pay school fees, tuition, and room and board where applicable. Any remaining money will be refunded to the student within 14 days via check, debit card, or EFT and can be used for education-related expenses, such as books, certification fees, a personal computer, dependent care, supplies, etc. Loans are generally disbursed at the beginning of each academic term, as defined by your school. For more information on how your school disburses federal Stafford Loans, contact the financial aid office.
The grace period for a Stafford Loan allows six months after leaving school before the loan repayment period will start. This means you will not make your first payment on your student loan for up to six months after leaving or completing school. The grace period can start if you drop below half-time enrollment as well. The grace period starts whether or not you graduate or finish your degree program.
For a subsidized loan, the government will continue to pay your interest during this time. If you leave school, or drop below half-time status and allow your grace period to complete, you cannot receive another grace period if you reapply for aid. This means no matter the reason, if you allow the grace period on a Stafford Loan to expire, you cannot get another six months. If you reenter school during your grace period, however, you may be eligible for another six-month grace period.
Repayment refers to the process of paying back the money you borrowed to the lender, which in the case of a Stafford Loan is the federal government. The government does employ outside institutions to collect money and service the actual loan. These are called loan servicers and can change through the course of your loan. The terms of your loan will stay the same no matter how many times the loan is transferred or whom your loan servicer is.
You can find information on whom your loan servicer is on the My Federal Student Aid website using your unique Federal Student Aid PIN. The PIN is an electronic signature unique to you and is used to apply for federal student aid online as well as to check the status of your loans and access your Federal Student Aid records. It is your responsibility to make sure your loan servicer has your current and updated contact information as well.
There are several options for repaying a Stafford Loan, and all of these should be covered during your exit interview. An exit interview is a required condition of obtaining a federal loan. During this interview, you will learn your responsibilities and rights as a borrower as well as learn how to repay your loan and the deferment options available to you.
Deferment and Forbearance
Sometimes things happen in your life, like losing a job or being deployed via active military duty, that may make it difficult to pay back your loan. Depending on the circumstances, you may be eligible for a deferment period. This is a period of time during which you can temporarily postpone your loan payments. If you have a subsidized Stafford Loan, the government will continue to pay your interest during this time; if you have an unsubsidized loan, you are responsible for the interest that will continue to accrue during deferment. To apply for deferment, you will need to submit your request to your loan servicer.
Even if you are not eligible for deferment, you may still qualify for a forbearance. There are two types of forbearance: mandatory and discretionary. Mandatory forbearance has specific eligibility criteria that require your lender to grant the forbearance. Some eligibility requirements include entering into a medical or dental internship, owing more than 20 percent more on student loans than your income, or performing a qualifying teaching service. A discretionary forbearance is granted based on illness or financial hardship, and your lender decides whether or not to approve it. You may be required to provide your loan servicer with supporting documentation.
Interest is charged on all types of loans during forbearance. Contact your lender or financial aid office for further information on eligibility or to make a request for a forbearance.
To apply for a federal Stafford Loan, the applicant needs to be United States citizen, must have a Social Security Number (SSN), a high school diploma or GED, complete and sign the Free Applicant for Federal Student Aid (FAFSA), and must not have defaulted on any other federal financial assistance program. To be considered for subsidized Stafford Loans, students must display financial need and be enrolled in an institute at least as a part-time student.
What is the difference between subsidized and unsubsidized Stafford Loans?
The difference between the subsidized and the unsubsidized Stafford Loans is simple to understand. The characteristics of both the loans are more or less the same in that they both have relatively low interest rates and a similar borrowing limit. The essential difference is that for subsidized Stafford Loans, the government pays the interest on the loan while the student is in school, while it does not do so for unsubsidized Stafford Loans.
What are subsidized Stafford Loans?
Subsidized Stafford Loans are federal loans offered to graduate and undergraduate students who are facing financial constraints. In order to receive this loan, an applicant must have a low Expected Family Contribution (EFC) as demonstrated on his or her Free Application for Federal Student Aid (FAFSA). Subsidized Stafford Loans are loans for which the interest rate is paid by the government for the time the student is enrolled in the degree program; after graduation, the interest rate remains both low and fixed. Students may begin repayment upon graduation, though subsidized Stafford Loans also allow students a six-month to one-year grace period after graduation to find employment and begin repayment on the loan.
What are unsubsidized Stafford Loans?
Unsubsidized Stafford Loans are federal loans offered to graduate and undergraduate students irrespective of their financial need. Interest accrues on unsubsidized Stafford Loans while the student is in school, as opposed to subsidized Stafford Loans. Students can borrow up to the entire cost of education less any other federal financial aid or loan received. The interest rate for both unsubsidized and subsidized Stafford Loans for undergraduates is 4.66%, which accrues over time if the student chooses not to pay it off while continuing their degree program. Loan repayment schedules are deferred and allow students a grace period to find a job and start paying off the loan.
When do I need to fill out the FAFSA? Is there a deadline?
You should fill out the FAFSA as soon as you can after January 1st of each year. Because the FAFSA asks for tax information from the previous calendar year, you may want to wait until your family has all of the necessary paperwork or has filed their income taxes. You can file the FAFSA before filing your income taxes using estimates, but you will need to go back later and correct any discrepancies.
The only deadline for filling out the FAFSA is June 30th at the end of the school year for which you are filing. In other words, for the 2014-2015 school year, the FAFSA will be available on January 1, 2014. You can file the FAFSA anytime between then and June 30, 2015. However, many states and schools allocate funds on a first-come, first-served basis, and some states have deadlines for filing the FAFSA to be eligible for certain kinds of aid. Please visit the Department of Education’s Student Aid on the Web for more information.
How long does it take for the FAFSA application to be processed?
How long the FAFSA takes to be process depends on how it is submitted – and if it is complete and correct when submitted. If it’s done online with an e-signature, it can take 3-5 days to see its status; if it’s done on paper via mail, it can take 7-10 days. The status will indicate if you completed the application properly or if more information is necessary before the FAFSA is sent to the school. Please visit the Department of Education’s Student Aid website for more information.
Keep in mind that the most common federal student loan – the Stafford Loan – is available regardless of need or income, but you MUST complete the FAFSA to qualify. It is worth the effort to complete the FAFSA.
What makes a person ineligible to receive FAFSA monies?
It is a common misconception that someone can be “ineligible” for financial aid because they make too much money. Everyone qualifies for unsubsidized federal loans, regardless of income.
People who do not qualify for federal aid include those without a high school diploma or GED, who are not U.S. citizens or eligible non-citizens, do not have a SSN, are not registered with the Selective Service (and are male), are not enrolled in an eligible program, or who are in default on a federal loan. Please visit the Department of Education’s Student Aid on the Web for more information.
When do I have to begin repaying a Stafford Loan?
After you graduate, leave school, or drop below half-time, there is a six-month grace period before you have to make a payment on your Stafford Loan(s). During this time, you will receive information about repayment and your first payment due date. You are responsible for repaying your loan(s) on time, even if you don’t receive this information. Payments are usually due monthly.
During the grace period on a subsidized loan, you don’t have to make any payments, but you will be charged interest. If you choose not to pay the interest that accrues during the grace period, the interest will be added (or capitalized) to the principal amount of the loan when the grace period ends. During the grace period on an unsubsidized loan, you don’t have to make any payments, but you will be charged interest. You can choose to pay the interest during the grace period, or, if you defer all payments until after the grace period, the interest on an unsubsidized loan will be capitalized, or added to your principal loan balance, increasing the total amount you owe.