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 loans are available to undergraduate, graduate, and professional students attending college at least half-time. The following information applies to undergraduate Stafford loans disbursed on or after July 1, 2012.
Stafford Loan Types
All students getting a Stafford loan can take advantage of its interest rates, which are generally 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.
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 maintain satisfactory academic progress as determined by the school.
Loan Rates and Fees
Interest rates. For the 2012-2013 school year the interest rate for new subsidized undergraduate Stafford loans is 3.4 percent. Interest rates on loans disbursed on or after July 1, 2013 are expected to jump to 6.8 percent unless Congress acts. The rate is 6.8 percent for unsubsidized undergraduate loans.
Loan fees. For loans first disbursed after March 1, 2013, loan fees are 1.05 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.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 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 ten and twenty-five 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 ten years.
- The extended plan sets up either a fixed or graduated payment over a period of twenty-five years. These are for large loan amounts.
- The income-sensitive plans allow payments to fluctuate according to the borrower's annual income, family size, and other factors. For example, new borrowers with financial hardship may qualify for the Pay As You Earn plan. It reduces monthly loan payments to 10 percent of discretionary income and forgives the remaining loan balance after 20 years of consistent payments. In some cases, the plan pays unpaid interest for up to three years.
With few exceptions, not repaying your student loan after you graduate will lead to garnishment of your wages and income tax refunds, and a negative impact on your 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.