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.