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What is a Stafford Loan?

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A Stafford Loan was provided by the federal government to help college and university students pay for their education. They were in use until July 1, 2010. None of these loans have been awarded since.

Instead, loans are now called Direct Loans because they come directly from the federal government.

Stafford Loans, named after Sen. Robert B. Stafford of Vermont, had been awarded through the Federal Family Education Loan (FFEL) program. Since 2010, Direct Federal Loans have been awarded through the William D. Ford Federal Direct Loan Program.

While some schools and financial entities and even many websites still use the term Stafford Loan, it is technically not correct to do so. Though many of the terms of the loans are similar, a Stafford Loan and a Federal Direct Loan are not the same. A Stafford Loan was issued by a bank, credit union, or other lender – then guaranteed by the government. A Direct Loan is issued by the U.S. Department of Education – or directly by the government.

Plenty of Direct Loans have been issued. In the third quarter of 2024, 37.5 million Americans had Direct Loan debt, with a total owed a whopping $1.43 trillion. Those include Subsidized and Unsubsidized student loans. A subsidized loan means the government pays the interest while the student is in college. Unsubsidized means the student pays all interest, and it starts accruing immediately.

We’ll take a look at Stafford Loans even though they are no longer offered. Information about them remains pertinent – especially to those who had Stafford Loans in the past.

What were some of the advantages of Stafford loans?

Stafford loans were the safest, most affordable student loans available. That didn’t ease future debt, but it might have made it a little easier to swallow when borrowing. Some of the benefits of the Stafford Loan included:

  • Fixed interest rates for the life of the loan
  • Low interest rate (5.6% in 2010)
  • Credit history wasn’t a factor
  • You didn’t have to repay the loan while in school
  • The six-month grace period that started the day you graduated or left school
  • Flexible repayment plans that were based on income and could have included loan forgiveness programs

What Were the Disadvantages of Stafford Loans?

All in all, Stafford loans were the safest, most affordable student loans out there, but there were a few disadvantages:

  • You had to fill out FAFSA forms and demonstrate financial need to receive subsidized Stafford loans
  • Subsidized Stafford loans were not available to graduate students
  • There were strict limits on the annual and total amount you could borrow for both undergraduate and graduate students
  • A loan origination fee of 1.057% was taken immediately out of each disbursement
  • Rates for new loans changed year-to-year
  • Unsubsidized loans accrued interest immediately, added up to a significant amount even while you were in school

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Types of Stafford Student Loans

As we mentioned, the two types of Stafford loans were subsidized and unsubsidized. Each type had different financial-need requirements and benefits.

Subsidized Stafford Loans

Subsidized Stafford loans were the most desirable student loans because the government paid the interest on the loan while the borrower was in school, during the six-month grace period after school and during a period of deferment if the borrower had financial trouble after graduation. These loans were awarded based on financial need.

Other key elements of subsidized Stafford loans included:

  • It was not available for graduate students
  • Borrowers had to demonstrate financial need through FAFSA
  • Subsidized interest while in school
  • Six-month grace period, meaning the first payment is not due until six months after graduation, or when you left school or dropped below half-time enrollment.

Unsubsidized Stafford Loans

An unsubsidized Stafford loan accrued interest while the borrower was in school, during grace periods and deferment periods. Students were not required to pay the accumulating interest during those periods, but if you chose not to pay, it was added to the principal amount of your loan.

Other key elements of unsubsidized Stafford loans include:

  • Loan origination fee of 1.057%
  • No requirement to demonstrate financial need
  • Interest was capitalized while in school
  • Six-month grace period

Stafford Loan Limits

There were dollar-amount limits on Stafford loans based on what year of school you were in, whether your Stafford loans were subsidized or unsubsidized, and whether you were financially dependent on your parents.

Subsidized Stafford Loans had stricter limits than unsubsidized. A first-year dependent student could take out a total of $5,500 in Stafford loans. Subsidized loans could make up a maximum of $3,500 of this total.

This means if you had a maximum of $3,500 in a subsidized loan, you could borrow another $2,000 in an unsubsidized loan that year. If you received a subsidized loan of only $1,000, this leaves $4,500 that you could borrow in the form of an unsubsidized loan.

If you were financially dependent and your parents were denied a Parent PLUS loan, you were eligible for the same loan limits as an independent student.

Federal Direct Loans share many of the same limits. Here is a look at Direct Loan limits in 2024:

Direct Loan Limits for Undergraduate Students
YearSubsidized Loan LimitAnnual Limit for Dependent StudentsAnnual Limit for Independent Students
Preparatory Coursework for an Undergraduate Program$2,625$2,625$8,625
First Year$3,500$5,500$9,500
Second Year$4,500$6,500$10,500
Third Year and Beyond$5,500$7,500$12,500
Preparatory Coursework for a Graduate Program$5,500$5,500$12,500
Teacher Certification Coursework$5,500$5,500$12,500
Total Undergraduate Limit$23,000$31,000$57,500

 

Direct Loan Limits for Graduate Students
YearSubsidized Loan LimitTotal Annual Limit
Graduate and Professional Students$0$20,500
Medical School Students$8,500$40,500
Total Graduate School Limit$65,500$138,500
Total Medical School Limit$65,500$224,000

*The total aggregate limit included all federal loans received for undergraduate study

**Subsidized loans were only available to undergraduate students

Applying for a Stafford Loan

You applied for a Stafford loan by completing a Free Application for Federal Student Aid (FAFSA) form. This application was used to determine if you received a Stafford loan, a Perkins loan, or another type of federal student loan.

If you were not eligible for any federal student aid, you may have looked into private education loans to finance your education. No matter what your financial situation or credit history, you should be able to find a loan to help you pay for your own or your child’s higher education.

Keep in mind that nowadays no new applications can be made for Stafford Loans. Instead, students can apply for Direct Subsidized Loans and Direct Unsubsidized Loans made under the William D. Ford Federal Direct Loan (Direct Loan) Program.

Stafford Loan Disbursement

Financial aid, including Stafford loans, was handled by your college’s financial aid office. First-time borrowers needed to complete entrance counseling (informing you of your obligation to repay the loan) and sign a Master Promissory Note (agreeing to the terms and conditions).

Financial aid was disbursed in two installments, typically at the beginning of each semester.

The school applied the funds to your school account balance. It covered tuition, fees, room and board, and any other school charges.

Can Stafford Loans Be Forgiven?

Student loan forgiveness and deferment options can help those having trouble making Stafford loan payments.

The Public Service Loan Forgiveness (PSLF) program allows for those who work for a public service employer to have their loans forgiven after 120 months (10 years) of payments. Those who work in public service like government (federal, U.S. Military, state, local, or tribal) or some non-profit organizations may qualify for the PSLF Program. The Department of Education’s website has the latest PSLF guidance.

Teachers employed full-time for at least five years in low-income secondary schools may be eligible for Teacher Loan Forgiveness, which can have $17,500 in Stafford loans forgiven.

Anyone having trouble repaying what is left of a Stafford Loan could consider the Income-Driven Repayment (IDR). Monthly payments in IDR are a percentage of discretionary income – income less necessary debts, like rent or mortgage. Income and family size must be updated each year.

A recent Court decision put some parts of the IDR plan on hold, though, so study the status of these loans carefully before committing.

Learn More About Student Loans

A Stafford Loan and a Direct Loan were and are not the only ways to find help for higher education.

Scholarships and grants from a school are the optimal way to pay for school. The student earned many of these awards, and they do not have to be repaid. Scholarships are awarded based on academic or athletic achievement. Grants are awarded to those in financial need.

Two other types of student loans include:

  • PLUS loans are federally funded loans available to students and parents. PLUS loans do not require good credit, but those with a bad credit history (like bankruptcy) in the previous five years would not qualify. PLUS loan recipients must start repaying them immediately. The interest rate is fixed for the duration of the loan.
  • Another option is a private student loan, available from different lenders or banks. Check and shop for the best interest rate when considering these loans.

The terms of any loan should be studied carefully before an agreement is reached. The major difference between federal student loans and private student loans is the cost and the use of credit scores in determining eligibility.

While borrowing for secondary education isn’t ideal, it can help those who don’t have the wherewithal to pay for college or graduate school.

Any loan must be considered seriously, both the pros and cons. While a student loan may provide help for paying the high costs of higher education in the short run, in the long run it can add a debt burden that can be difficult to handle.

Given the options, the Stafford Loan was a valuable resource.

Anyone considering Direct Loans should think in depth about whether they are worth it. If a student is taking out a loan to attend a private school when good public school options are available at a lower price without a loan, it may make sense to consider the public school.

Credit counseling from a nonprofit agency can help those wading through the student loan repayment process. Credit counseling is typically free, and can offer solutions to financial problems that may have popped up during or soon after the college years, especially troubles paying credit card debt.

Counselors work with each individual to create an affordable budget that will include payment for student loans and credit card debt through a debt management program.

About The Author

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet.

Sources:

  1. Safier, R. (2024, March 5) Average Student Debt Statistics (2024). Retrieved from https://www.credible.com/refinance-student-loans/average-student-debt
  2. Chafin, Jill A. (2023, September 22) Parent PLUS Loans: Complete Guide. Retrieved from https://www.lendingtree.com/student/parent-plus-loans/
  3. Welding, L. (2024, January 17) Average Student Loan Payment. Retrieved from https://www.bestcolleges.com/research/average-student-loan-payment/
  4. Farrington, R. (2024, January 23) Student Loan Deferment Options: What to Know. Retrieved from https://thecollegeinvestor.com/9949/student-loan-deferment/
  5. Proctor, C. (2024, February 20) Student Loan Limits: How Much You Can Borrow in Federal and Private Student Loans. Retrieved from https://www.studentloanplanner.com/how-much-can-borrow-student-loans-limits/