The Federal Stafford Loan is a low-cost, fixed-rate federal student loan available to undergraduate students attending a college or university that participates in the Title IV federal student aid programs. Eligibility for undergraduate Federal Stafford loans is not based on the borrower’s credit history or credit scores.
Federal Stafford Loans for undergraduate students may be subsidized or unsubsidized depending on the student’s demonstrated financial need. Any amounts not received as subsidized Federal Stafford loans may be borrowed as unsubsidized Federal Stafford loans up to the overall annual Federal Stafford loan limit. Undergraduate students remain eligible for subsidized Federal Stafford loans, unlike graduate students, who, as of July 1, 2012, are eligible to receive only unsubsidized Federal Stafford Loans.
Repayment on a Federal Stafford loan begins 6 months after the student graduates or drops below half-time enrollment status. The federal government pays the interest on subsidized loans while the borrower is enrolled in school at least half-time and during periods of authorized deferment. Interest on unsubsidized loans remains the responsibility of the borrower and will be capitalized (added to the loan balance) if the borrower does not pay the interest as it accrues.
The interest rate on subsidized and unsubsidized Federal Stafford loans for undergraduate students is 4.29% for the 2015-2016 academic year, with a loan fee of 1.068%. This is less expensive than the 6.84% interest rate on Federal Parent PLUS loans, which also has a 4.272% loan fee.
Undergraduate students may borrow up to $12,500 per year in subsidized and unsubsidized Federal Stafford loans combined. The cumulative loan limits are $31,000 for dependent students and $57,500 for independent students (and for dependent students whose parents were denied a Federal Parent PLUS loan).
On August 9, 2013, President Obama signed the Bipartisan Student Loan Certainty Act of 2013 (P.L. 113-28), changing how student loan interest rates are determined. The bill links interest rates on new federal education loans made on or after July 1, 2013 to the 10-year Treasury rate, plus a fixed margin. The interest rates on new loans are still fixed for the life of the loan; however, each year’s new loans will have different fixed rates, based on current market rates.
|Academic Year||Subsidized Loans||Unsubsidized Loans||Graduate Students|
Before 2006-2007, interest rates on Federal Stafford Loans were variable, with different rates depending on whether the borrower was in the in-school and grace periods or in the repayment period. (In 1993-1994 and earlier award years, the interest rates were the same for the in-school, grace and repayment periods.) Interest rates during the repayment period were 0.60% higher. Borrowers could lock in the current rate (rounded to the nearest 1/8th of a percentage point) by consolidating the loans. Interest rates were the same for undergraduate, graduate and professional students. Interest rates were also the same for subsidized and unsubsidized Federal Stafford Loans. The next table shows the variable interest rates on the Federal Stafford Loans in effect at the time the loans were disbursed through 2005-2006.
|Academic Year||In-School and Grace Periods||Repayment Period|
Fees on Federal Stafford Loans are 1.073% for loans disbursed from 10/1/2014 to 9/30/2015 and 1.068% for loans disbursed from 10/1/2015 to 9/30/2016.
||Total Loan Fees|
|2015-2016 (10/1/15 - 9/30/16)||1.068%|
|2014-2015 (10/1/14 - 9/30/15)||1.073%|
|2014-2015 (7/1/14 - 9/30/14)||1.072%|
|2013-2014 (12/1/13 - 6/30/14)||1.072%|
|2013-2014 (7/1/13 - 11/30/13)||1.051%|
|2005-2006 and before||4.0%|
Loan disbursement and default fees are effectively a form of up-front interest. Assuming a 10-year repayment term, a 4% fee is the equivalent of an increase in the interest rate of about seven-eighths to one percentage point. Assuming a 30-year repayment term, a 4% fee is the equivalent of an increase in the interest rate of about one-third to half a percentage point. The relative impact of a fee is greater with a shorter repayment term or if the borrower prepays the loan, since the fee will be amortized over less time. This is why borrowers who plan to pay off a loan early may wish to avoid up-front fees, if possible.
Up to $2,500 total in interest on federal and private student loans may be deducted on the borrower’s federal income tax return each year. The deduction occurs as an above-the-line exclusion from income and so may be claimed even if the borrower doesn’t itemize deductions. This reduces the cost of the loan, the equivalent of a small reduction in the interest rate.
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