For the past seven years, Kat has been helping people make the best financial decisions for their unique situations, whether they're looking for the right insurance policies or trying to pay down debt. Kat has expertise in insurance and student loans.
Kat Tretina Personal Finance WriterFor the past seven years, Kat has been helping people make the best financial decisions for their unique situations, whether they're looking for the right insurance policies or trying to pay down debt. Kat has expertise in insurance and student loans.
Written By Kat Tretina Personal Finance WriterFor the past seven years, Kat has been helping people make the best financial decisions for their unique situations, whether they're looking for the right insurance policies or trying to pay down debt. Kat has expertise in insurance and student loans.
Kat Tretina Personal Finance WriterFor the past seven years, Kat has been helping people make the best financial decisions for their unique situations, whether they're looking for the right insurance policies or trying to pay down debt. Kat has expertise in insurance and student loans.
Personal Finance WriterUpdated: Oct 22, 2020, 9:10am
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Stafford loans are the single largest source of federal financial assistance for students pursuing postsecondary education. According to the U.S. Department of Education, over $100 billion in new loans will be issued through the program in 2020 alone.
If you’re planning to attend college or graduate school, Stafford loans should be the first loans you turn to since they usually have lower interest rates and more favorable repayment terms and protections than other student loans. Here’s how they work.
When it comes to federal student loans, there is only one loan program active right now: direct loans. However, some people refer to direct loans as direct Stafford loans or Stafford loans, which can cause you to think there are multiple loan programs.
Direct Stafford loans are part of the William D. Ford Federal Direct Loan Program, which issues low-interest loans to students who need help covering the cost of their education. Founded in 1994, loans issued through the direct loan program are available to both undergraduate and graduate students attending four-year colleges, community colleges or trade schools.
There are four different types of direct loans:
For undergraduate students, there are two main options: subsidized and unsubsidized loans. But what’s the difference? Depending on which loan you qualify for, you could save money over the course of your repayment period.
Subsidized loans are only available to undergraduate students with financial need. The U.S. Department of Education covers the interest that accrues on the loans while you’re in school at least half-time, during your grace period after graduation and during periods of deferment. Because the government is paying some of your interest charges, subsidized loans are less expensive than unsubsidized direct loans.
Unsubsidized direct loans are available to all undergraduate and graduate students, regardless of financial need. While you don’t have to make payments while you’re in school, interest will start accruing immediately, and you’re responsible for paying all interest charges.
To qualify for a direct loan, you must:
[Note: As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, federal direct loan payments are suspended until Aug. 31, 2022, and the interest rates are set at 0%]
Direct loans tend to have lower interest rates than other forms of student loans. For loans issued between July 1, 2022, and June 30, 2023, the following interest rates apply:
Most federal loans charge disbursement fees that are a percentage of your loan amount. The fee is deducted from each loan you take out, meaning you’ll receive less money overall.
For loans issued between July 1, 2022, and June 30, 2023, the following disbursement fees apply:
Let’s say you took out a $10,000 direct parent PLUS Loan. Before the loan is disbursed, the U.S. Department of Education would deduct 4.228% of the loan amount—$422.80—and you would receive $9,577.20 to cover your education costs.
With most federal loans, there are caps on how much you can borrow each year. The borrowing limits vary based on your grade level and dependency status. Generally, you’re considered independent if you’re over 24 years old, married, a graduate or professional student, a veteran or in the military.
$3,500 in subsidized loans
$2,000 in unsubsidized loans ($5,500 maximum)
$3,500 in subsidized loans
$6,000 in unsubsidized loans ($9,500 maximum)
$4,500 in subsidized loans
$2,000 in unsubsidized loans ($6,500 maximum)
$4,500 in subsidized loans
$6,000 in unsubsidized loans ($10,500 maximum)
$5,500 in subsidized loans
$2,000 in unsubsidized loans ($7,500 maximum)
$5,500 in subsidized loans
$7,000 in unsubsidized loans ($12,500 maximum)
With Parent PLUS Loans, parent applicants can borrow up to 100% of the total cost of attendance at their child’s selected school.
If you need money to pay for school, federal Stafford loans are a good place to start. Not only do they have lower interest rates than most private student loans, but they have other benefits that can make managing your debt easier.
Direct Stafford loans are the only federal loans eligible for income-driven repayment (IDR) plans. If you enroll in an IDR plan, your loan servicer sets your monthly loan payment at a percentage of your discretionary income and extends your repayment term. Depending on your income and family size, you could qualify for a much lower monthly payment than you currently have.
If you have federal direct loans and work for a non-profit organization or government agency, you may qualify for Public Service Loan Forgiveness (PSLF). With PSLF, you can qualify for loan discharge after working for an eligible employer for 10 years while making 120 monthly payments. Only Stafford loan borrowers are eligible for PSLF.
With direct loans, you may temporarily postpone your payments—without becoming delinquent or entering student loan default—if you’re eligible for federal forbearance or deferment. Depending on your situation, you may be able to pause payments for up to 12 months at a time, giving you time to recover from financial issues or medical emergencies.
While Stafford loans are less expensive than other student loans, they do have annual and aggregate borrowing limits. If you reach the loan cap and still need additional money to pay for school, private student loans can be a useful option. Check out the best private student loan lenders to see what loans are available.
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Personal Finance WriterFor the past seven years, Kat has been helping people make the best financial decisions for their unique situations, whether they're looking for the right insurance policies or trying to pay down debt. Kat has expertise in insurance and student loans, and she holds certifications in student loan and financial education counseling.
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