The federal Stafford Loan Program is the biggest source of low-interest college loans. In fact, almost any college student can get one. Got your attention? Here are the main points you need to know, all in one place.
Stafford Loan Types
All students getting a Stafford loan can take advantage of its interest rates, which are lower than regular consumer loan rates. Undergraduate students with financial need, however, get an additional benefit: a subsidized Stafford loan. "Subsidized" means that the interest is paid by the government while the student is in college. Students without financial need are eligible for an "unsubsidized" Stafford loan, with interest accruing as soon as the student gets the loan.
Eligibility
Stafford loans are available to undergraduate, graduate, and professional students attending college at least half time. The eligibility requirements are the same as for all federal financial aid. The student must certify that the loan will be used only for educational purposes, and must maintain satisfactory academic progress as determined by the school.
Loan Rates and Fees
Interest rates. For the 2010–2011 school year, the interest rate for new subsidized undergraduate Stafford loans is 4.5 percent. (The rate will continue to reduce for new subsidized undergraduate loans each year until July 1, 2012. At that point the interest rate is scheduled to return to 6.8 percent.) The interest rate for all other Stafford loans is fixed at 6.8 percent.
Loan fees. Loan fees can be up to 1.0 percent of the loan amount.
Loan Amount Limits
Dependent student limits. A dependent freshman can borrow a subsidized loan up to $3,500. The limit goes up to $4,500 in the sophomore year and $5,500 in each of the junior and senior years. Dependent undergraduates can borrow up to $2,000 in additional unsubsidized loans.
Independent student limits. Independent students have the same limits for subsidized loans, but they can borrow larger unsubsidized loans: up to $6,000 for freshmen and sophomores and up to $7,000 for juniors and seniors.
Total amount limits. The total amount of loans for a dependent undergraduate student is limited to $31,000 ($23,000 of which can be subsidized). The limit is $57,500 for independent undergraduate students ($23,000 of which can be subsidized).
For more information, check with studentaid.ed.gov.
Stafford Loan Application Steps
Applying for a Stafford loan is simple:
- Submit a completed Free Application for Federal Student Aid (or FAFSA).
- Accept the loan offered in the financial aid award offer.
- Sign a Master Promissory Note (or MPN).
The FAFSA is available online from fafsa.ed.gov. The MPN is a contract, or "promissory note," in which the student promises to repay the loan according to the terms it spells out. It doubles as the loan application. It's called a "Master" Promissory Note because it can be used for all college loans for up to ten years if the student stays with the same lender and college. While students fill out just one MPN, they must file a renewal FAFSA every year to continue receiving aid.
Getting the Money
The federal government now disburses all Stafford loans to the college through the Direct Loan Program. The school then disburses the loan money to the student. The school first uses the money to pay the student's tuition, fees, and room and board. If loan funds remain, the student will receive them by check or in cash, unless the school has written permission to hold the funds until later in the enrollment period.
Repayment Plans Are Flexible
Students have several repayment plans to choose from. The plans allow between 10 and 25 years to repay a Stafford loan, with payments beginning six months after you leave college or drop below half-time enrollment.
- The standard plan sets up the same payment amount every month (with a minimum payment of $50).
- The graduated plan starts out with lower payments that increase every two years. You must repay this loan within 10 years.
- The extended plan sets up either a fixed or graduated payment over a period of 25 years. These are for large loan amounts.
- The income-sensitive plans allow payments to fluctuate according to the borrower's annual income, but cannot be less than the interest accrued between payments. There is one plan specifically for Direct loans and one for FFELs. The Income Based Repayment Plan (IBR) is for all major federal loans and caps monthly payments at an amount based on the student's income and family size. Students are eligible for this plan if the amount they would pay under IBR would be less than what they would pay under the standard plan. The remainder of the loan may be forgiven if the student consistently makes payments for 25 years or works in public service for 10 years.
What the Federal Guarantee Means—and What It Does Not Mean
Stafford loans are guaranteed. If a student doesn't pay back the loan, the government will reimburse the lender. This makes them attractive to lenders and keeps the cost to the student at reasonable levels. However, it does not mean the borrower should consider not repaying them. With few exceptions, that will lead to wages and income tax refunds being garnished, and a negative impact on the borrower's credit history. Not even bankruptcy can clear a borrower of student loan debt.
Note: Financial information provided on this site is of a general nature and may not apply to your situation. Contact a financial or tax advisor before acting on such information.
