How Stafford Loans Work

If you need help financing your college education, look into Stafford Loans. See more college pictures.
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Are you ready to put together a plan to finance your college education? For many students, Stafford loans can be an excellent way to finance the difference between your school's tuition and the amount you can contribute toward your own education.

Low interest rates, the ability to qualify without an established credit history or co-signer, and a deferred repayment period are key advantages offered by Stafford loans, especially when compared to private loans or credit card.


Stafford loans, also known as Federal Family Education Loans (FFEL), are federal student loans available to college students. They're designed to supplement scholarships, grants, work-study jobs and family resources to help meet the cost of tuition, fees, room and board. Nearly all students are eligible to receive some type of loan.

There are two types of Stafford loans, both secured by the federal government. In other words, if a student defaults on the loan, Uncle Sam must repay the lender who agreed to loan the funds.

Subsidized loans are based on need; this is determined by evaluating your available resources. You won't be charged any interest on the loan while you're in school or during a deferment period. The federal government makes these payments as long as you are in school.

Unsubsidized loans aren't based on need. Interest begins to accrue as soon as the loan is disbursed and is added on to the loan balance after graduation.

To apply for a loan, you'll need to complete a Free Application for Federal Student Aid (FAFSA). Once the application is reviewed by the U.S. Department of Education and your school to determine eligibility, you'll be asked to choose a lender and sign a legal agreement promising to meet the terms of the loan.

Each academic year, your loan money will be disbursed to your school in at least two installments, usually at the beginning of each semester. It must be used to pay for tuition and fees, room and board, and other school charges. If any money remains, you'll receive the remaining funds by check or a direct deposit to your bank account, unless you ask the school to hold the funds to apply towards the next enrollment period.

Read on to learn more about how much money you may be eligible to borrow.


How much can you borrow with a Stafford loan?

The amount that you can borrow through a Stafford loan depends on your year in school, and whether you qualify for a subsidized or unsubsidized loan.

If you're a dependent undergraduate student, each year you can borrow up to:


  • $5,500 if you're a first-year student enrolled in a program of study that is at least a full academic year. Not more than $3,500 of this amount can be in subsidized loans.
  • $6,500 if you've completed your first year of study and the remainder of your program is at least a full academic year. No more than $4,500 can be in subsidized loans.
  • $7,500 if you've completed two years of study and at least a full academic year of your program remains. No more than $5,500 can be in subsidized loans.

If you're an independent undergraduate student or a dependent student whose parents were unable to get a PLUS (parent) loan, each year you can borrow up to:

  • $9,500 if you're a first-year student enrolled in a program that is at least a full academic year. No more than $3,500 can be in subsidized loans.
  • $10,500 if you've completed your first year of study and at least a full academic year remains in your program. No more than $4,500 can be in subsidized loans.
  • $12,500 if you've completed two years of study and the remainder of your program is at least a full academic year. No more than $5,500 can be in subsidized loans.

If you're a graduate student, each year you can borrow up to $20,500. No more than $8,500 of that amount may be in subsidized loans. When you complete a graduate or professional degree, the maximum amount of debt allowed from Stafford loans is $138,500 -- including loans received for undergraduate study -- with no more than $65,500 from subsidized loans.

However, the loan limit rises to $224,000 for certain health care professional programs. This higher limit is designed to encourage qualified students to pursue degree programs in these critical fields of study. Keep in mind that you can't borrow more than your total cost of attendance minus the amount of any Federal Pell Grant you receive and any other financial aid or scholarship you receive, so you may receive less than the annual maximum amounts [source: Student Aid on the Web]

Next, learn more about the low interest rate benefits of Stafford loans.


Stafford Loan Interest Rates

If you're a member of the class of 2010, you're in luck: You may save a little money on your Stafford loans.
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Low interest rates help make Stafford loans an attractive option for students looking for a way to fund their college educations. Since the federal government secures the loans, financial institutions are willing to lend at a lower interest rate than credit cards or private loans.

Currently, the rate on Stafford subsidized loans for the 2009-2010 academic year is a fixed 5.6 percent for undergraduate subsidized loans and 6.8 percent for undergraduate unsubsidized loans. You can pay the interest every month or defer it until you graduate, when it will be added to your loan balance. Graduate Stafford Loans (subsidized and unsubsidized) have a fixed rate of 6.8 percent through 2013.


There's good news for students who plan to start school between now and 2012. The College Cost Reduction Act of 2007 will drop rates to 4.5 percent for the 2010-11 academic year and to 3.4 percent for 2011-12. The new rates will help students save thousands of dollars over the life of the loan [source: Androitis].

After 2012, the interest rates of subsidized Stafford loans are unknown. They're expected to rise to 6.8 percent for the 2012-2013 academic year, but Congress is currently reviewing an option to switch rates from fixed to variable with a maximum rate of 6.8 percent.

In addition to interest, there's a fee of up to 1.5 percent of the loan that goes to the government or the organization that administers the loans in your state to help reduce the cost of the loans. And if you don't make your loan payments on time, collection costs and late fees may be added to the loan.


Paying Back Your Stafford Loan

Once you complete your studies and begin your career, you'll need to budget carefully and work out a plan to repay your loan. The repayment period for a Stafford loan is usually 10 years.

Fortunately, Stafford loans allow a six-month grace period once you've graduated, left school or decided to enroll less than half time. During this time, you'll receive repayment information that will include your first payment due date.


You can choose from one of the following repayment plans:

  • The standard repayment plan requires you to pay a fixed amount each month based on your principal and interest, but will be no less than $50 or the interest that has accrued.
  • The graduated repayment plan allows you to make lower payments at the beginning, but payment amounts will rise over time. This plan makes sense if you believe your income will rise significantly as your experience increases.
  • The income-sensitive repayment plan bases your monthly payment on your annual income and loan amount. The payment may change as your income rises or falls. This plan could be a good option if your income is based on sales commissions or market conditions.
  • The extended repayment plan is for borrowers with loans totaling more than $30,000, and allows you to extend your repayment period up to 25 years [source: Student Loan Network].

Payments are usually due monthly, and they're paid to a private lender or loan servicer. If you choose to repay your loan balance early, perhaps with extra funds received from an inheritance or bonus, there are no penalties for early payment and you can reduce the amount of total interest.

If you're having problems paying back your loan, you may quality for a deferment period on your loan during which no payments will be required. If you're unable to make payments temporarily, perhaps due to poor health or job loss, your lender may be able to grant forbearance for a specified period.

Finally, you may wonder if there are ever any conditions when your student loans may be cancelled or forgiven. It's possible, but only under very specific circumstances, such as death, disability, bankruptcy, or service in certain professions. It's best to take responsibility for repaying that student loan, budget accordingly, build a solid credit history and help make it possible for the Stafford loan program to continue to back low-interest loans for students.


Lots More Information

Related HowStuffWorks Articles


  • Androitis, Annamaria. "Stafford Loan Rates are Falling." The Wall Street Journal. February 14, 2010. (February 24, 2010)
  • Androitis, Annamaria. "College Decision Time: Sizing Up Financial Aid." SmartMoney. April 7, 2009. (February 24, 2010)
  • "Stafford Loans." Student Aid on the Web. U.S. Department of Education. (February 25, 2010)