Introduction to Federal Stafford Loans

The Federal Stafford loan is the most popular student loan program. Nearly $84 billion in Federal Stafford loans were disbursed in 2012-2013, up from $71 billion in 2011-2012. About one-third of the loans were subsidized Federal Stafford loans to undergraduate students, slightly more than a third were unsubsidized Federal Stafford loans to undergraduate students and slightly less than a third were unsubsidized Federal Stafford loans to graduate and professional students.

The U.S. Department of Education pays the interest on subsidized Federal Stafford loans while the student is enrolled in school on at least a half-time basis and during other periods of authorized deferment (e.g., during an economic hardship deferment). The interest on an unsubsidized Federal Stafford loan begins accruing from the date the loan is disbursed and remains the responsibility of the borrower. If the borrower does not pay the interest as it accrues, the interest is capitalized (added to the loan balance) when the loan enters repayment. This can increase the loan balance by as much as 20% to 25%.

Subsidized Federal Stafford loans are awarded based on demonstrated financial need. Unsubsidized Federal Stafford loans do not depend on financial need and are available even to wealthy students. Only 7.2 percent of undergraduate subsidized Federal Stafford loan borrowers had adjusted gross income (AGI) of $100,000 or more in 2011-12, compared with 14.3 percent of undergraduate unsubsidized Federal Stafford loan borrowers.

All Federal Stafford loan borrowers must file the Free Application for Federal Student Aid (FAFSA) even if they are interested in only unsubsidized loans. Borrowers of Federal Stafford loans must also be enrolled on at least a half-time basis, in addition to satisfying the general eligibility requirements for federal student aid, such as pursuing a degree or certificate program at a postsecondary institution that is eligible for Title IV federal student aid funding, maintaining satisfactory academic progress, not being in default on a federal education loan, and not owing a refund on a federal student grant. Federal Stafford loans do not depend on the borrower's credit history, credit scores or debt-to-income ratios, so even students with bad credit may qualify for these education loans.

Federal Stafford loans are made by the U.S. Department of Education's direct loan program, more formally known as the William D. Ford Federal Direct Loan Program. Similar loans were previously made also by the Federal Family Education Loan (FFEL) program, sometimes called the guaranteed student loan program. Congress ended the FFEL program on June 30, 2010. Since July 1, 2010, all new federal education loans, including the Federal Stafford loan, have been made through the direct loan program.

Federal Stafford loans are available to undergraduate, graduate and professional school students. There are differences, however, in the interest rates and loan limits. Also, graduate and professional students are eligible only for the unsubsidized Federal Stafford loan program.

Interest Rates and Fees

The interest rates on Federal Stafford loans are fixed. Fixed interest rates do not change over the life of the loan. Current interest rates for the 2014-2015 academic year are 4.66% for subsidized and unsubsidized Federal Stafford loans to undergraduate students and 6.21% for unsubsidized Federal Stafford loans to graduate and professional students. These are among the lowest interest rates available to borrowers for unsecured loans without a credit check.

Each year's new loans have a new fixed rate, pegged to the 10-year Treasury yield plus a margin. The new interest rates for loans disbursed from July 1 to June 30 are based on the last 10-year Treasury auction in May. The interest rate formulas and caps are shown in this table.

Type of Federal Stafford Loan Interest Rate Formula Interest Rate Cap Current Interest Rate (2014-2015)
Undergraduate Students 10-Year Treasury + 2.05% 8.25% 4.66%
Graduate and Professional Students 10-Year Treasury + 3.60% 9.5% 6.21%

The fees on Federal Stafford loans are about 1%. (The fees have increased slightly due to federal budget sequestration. The current fee is 1.073%.) Fees are deducted proportionately from each loan disbursement. Borrowers may ask the college financial aid office to increase the amount borrowed to cover the fees, up to the annual loan limit.

Loan Limits

The amount students can borrow from the Federal Stafford loan program is subject to annual and cumulative loan limits.

The annual loan limits depend on several factors, including the borrower's dependency status, degree level and year in school. There are different loan limits for subsidized and unsubsidized Federal Stafford loans. The cumulative loan limits depend on the borrower's dependency status and degree level.

Loan limits are also capped at the college's annual cost of attendance.

Loan Limits for Undergraduate Students

The annual loan limits for subsidized Federal Stafford loans to undergraduate students are $3,500 for freshmen, $4,500 for sophomores, $5,500 for juniors and $5,500 for seniors. Lower amounts may be awarded by the financial aid office, depending on the student's demonstrated financial need.

The annual loan limits for unsubsidized Federal Stafford loans to dependent undergraduate students are $5,500 for freshmen, $6,500 for sophomores, $7,500 for juniors and $7,500 for seniors. The annual loan limits for unsubsidized Federal Stafford loans to independent undergraduate students are $9,500 for freshmen, $10,500 for sophomores, $12,500 for juniors and $12,500 for seniors. These unsubsidized Federal Stafford loan limits are reduced by the amount of any subsidized Federal Stafford loans received by the student.

Dependent students whose parents are denied a Federal Parent PLUS loan are eligible for the higher unsubsidized Stafford loan limits available to independent students.

The cumulative loan limit for the subsidized Federal Stafford loan is $23,000.

The cumulative loan limits for the unsubsidized Federal Stafford loan are $31,000 for dependent undergraduate students and $57,500 for independent undergraduate students, minus any amounts received as subsidized Federal Stafford loans.

Loan Limits for Graduate and Professional Students

The annual Federal Stafford loan limit for graduate and professional students is $20,500. Medical school students may borrow up to $33,000 or $40,500 per year, depending on their academic degree program, for a 9-month academic year.

The cumulative Federal Stafford loan limit for graduate and professional students is $138,500. Medical school students may borrow up to $224,000. These cumulative loan limits include all undergraduate Federal Stafford loan debt.

In-School Deferment and Grace Period

Borrowers may defer repaying Federal Stafford loans while they are enrolled in school on at least a half-time basis. Borrowers may also defer repaying Federal Stafford loans during a 6-month grace period after the borrower graduates or drops below half-time enrollment.

Interest on subsidized Federal Stafford loans is paid by the U.S. Department of Education during the in-school deferment period. Previously, the U.S. Department of Education would also pay the interest on subsidized Federal Stafford loans during the grace period. The Consolidated Appropriations Act of 2012, however, eliminated this subsidized interest benefit during the grace period for new subsidized Federal Stafford loans during the 2012-2013 and 2013-2014 award years. Subsidized Federal Stafford loans first disbursed on or after July 1, 2014 are once again eligible for the subsidized interest benefit during the grace period.

Unpaid interest that accrues during the in-school and grace periods is capitalized by adding it to the loan balance at the end of the grace period, when the loan enters repayment.

Federal Stafford loans are eligible for a variety of other deferments and forbearances. Deferments and forbearances suspend the repayment obligation for a short period of time and can help borrowers who are having trouble repaying their loans.

Repayment

The Federal Stafford loan is repaid over a standard 10-year repayment term.

Each monthly payment under standard repayment is the same, except possibly for the last payment. This is known as level amortization. As the beginning of the repayment term, most of the loan payments will be applied to interest. As the principal balance decreases, more of each payment will be applied to further reducing the principal balance. The loan balance will decrease quicker as the end of the repayment term approaches.

Borrowers who have $30,000 or more in Federal Stafford loan debt with a single lender may qualify for 25-year extended repayment. This is a level repayment plan, but over 25 years instead of 10 years.

Borrowers who consolidate their federal student loans are eligible for a different version of extended repayment, where the loan term is based on the amount owed. For example, a borrower with $20,000 in Federal Stafford loans may qualify for a 20-year repayment term. The available repayment terms are shown in this table.

Loan Balance Maximum Loan Term
Less than $7,500 10 years
$7,500 to $9,999 12 years
$10,000 to $19,999 15 years
$20,000 to $39,999 20 years
$40,000 to $59,999 25 years
$60,000 or more 30 years

The monthly payments under various interest rates and repayment terms are shown in the next table. This table assumes $100,000 in student loan debt.


Monthly Loan Payment ($100,000)
Loan Term 3.4% 3.86% 5% 6%  6.8% 7% 7.9%  8.25%  8.5%  9.5% 
10  $984 $1,006 $1,061 $1,110 $1,151 $1,161 $1,208 $1,227 $1,240 $1,294
12 $847 $869 $925 $976 $1,018 $1,028 $1,077 $1,096 $1,110 $1,166
15 $710 $733 $791 $844 $888 $899 $950 $970 $985 $1,044
20 $575 $599 $660 $716 $763 $775 $830 $852 $868 $932
25 $495 $520 $585 $644 $694 $707 $765 $788 $805 $874
30 $443 $469 $537 $600 $652 $665 $727 $751 $769 $841

Monthly loan payments for other debt levels are proportional to the amount of debt. Note that the Federal Stafford loan has a $50 minimum monthly payment under standard and extended repayment.

Increasing the repayment term decreases the monthly payment, but increases the total interest paid over the life of the loan. For example, increasing the repayment term on a 6.8% interest rate loan from 10 years to 20 years will cut the monthly payment by a third, but more than double the total interest paid over the life of the loan. The monthly payment on a $20,000 unsubsidized Federal Stafford loan at 6.8% interest is $152.67 on a 20-year term, 33.7% lower than the $230.16 monthly payment on a 10-year term. The total interest paid on the 20-year loan is $16,639.74, more than 2.18 times the $7,619.31 total interest paid on the 10-year loan.

Federal Consolidation loans are also eligible for other repayment plans, such as graduated repayment, income-contingent repayment, income-based repayment and pay-as-you-earn repayment. Graduated repayment begins with low payments that are increased every two years, with no payment more than three times the lowest payment. The other repayment plans are based on a percentage of the borrower's discretionary income.

How to Apply

To apply for a Federal Stafford loan, the student must file the Free Application for Federal Student Aid (FAFSA). After the form is processed, the college financial aid office will determine and notify the student about his or her eligibility for subsidized and unsubsidized Federal Stafford Loans.

First-time Federal Stafford loan borrowers will be required to undergo entrance counseling to review the terms of their loans. After the student graduates or drops below half-time enrollment status, the student will be required to undergo exit counseling.

The student will be required to sign a Master Promissory Note (MPN) before the loans can be disbursed. The Master Promissory Note covers a continuous period of enrollment of up to 10 years.

The loans will be disbursed in two disbursements, once per payment period. There will be a 30-day delay in disbursing student loan proceeds to first-time, first-year borrowers. (There are exceptions to the multiple disbursements rule and the 30-day delay at colleges with low default rates.) After the loan proceeds are applied to tuition and fees (and room and board, if the student is living in college housing), the remaining loan credit balance, if any, will be refunded to the student within 14 days.

Additional Information

Federal Stafford loans in the direct loan program may qualify for a 0.25% interest rate reduction if the borrower repays the loan using auto-debit, where the monthly loan payments are automatically transferred from the borrower's bank account.

Up to $2,500 a year in interest paid on federal and private student loans, including the Federal Stafford loan, may be excluded from income on the borrower's federal income tax return using the student loan interest deduction.

Federal Stafford loan borrowers may be eligible for a variety of loan forgiveness, cancellation and discharge programs, including teacher loan forgiveness and public service loan forgiveness.

Students should always borrow federal first, since federal student loans are cheaper, more available and have better repayment terms. However, if a student has exhausted the Federal Stafford loan limits, he or she may wish to consider borrowing from a private student loan program.