An Overview of Stafford Loans

Stafford Loans are the main federal student loan program for undergraduate and graduate students. They are essentially student loans guaranteed by the government (meaning the government protects the lender in case you default). Because the government is backing your loan, Stafford loans will almost always be cheaper than private loans, offering you a lower interest rate.

Unsubsidized vs. Subsidized

Stafford Loans are the main federal loan program for undergraduate and graduate students. They are essentially student loans guaranteed by the government (meaning the government protects the lender in case you default). Because the government is backing your loan, Stafford loans will almost always be cheaper than private loans, offering you a lower interest rate.

When doing research on Stafford loans, you'll probably notice that there are essentially two types of Stafford loans: Unsubsidized and Subsidized. These terms basically refer to the interest you are being charged while in school.

For subsidized Stafford loans, the government is helping you out, picking up the tab on your interest payments while you are in school. This is a major savings for student borrowers. This means that the amount you borrow will be the amount you owe when you enter repayment (plus whatever up-front fees the lender may charge).

For unsubsidized Stafford loans, you're responsible for the interest on your student loan during college or graduate school. You can defer these interest payments until after graduation, but the interest will be capitalized, meaning it will be added to your principal. This will increase the cost of your unsubsidized Stafford loan.

The good thing about the unsubsidized Stafford loan is that every student is eligible to receive one, regardless of their financial need. You need to qualify, based on your financial need, to receive a subsidized Stafford loan. If you are eligible for a subsidized Stafford loan, you will see it as part of your financial aid package from your college or graduate school.

FFELP vs. Direct

You may come across the terms FFELP and Direct Loans in reference to Stafford loans. These are the two programs for distributing Stafford loans. Each college decides which program it wants to use for its students. Most colleges participate in one program or the other, but some actually participate in both.

Under the FFELP program, you will get your Stafford from a lender (like Discover Financial Services, Sallie Mae, or CitiBank). In this situation, you need to make a decision about which lender is right for you. Colleges will often present you with a Lender List containing information about the Stafford loans offered by various lenders. You have the option of picking a lender off this Lender List or going with another lender that you may have uncovered in your research.

Under the Direct Loan program, the federal government is your lender. In this situation, you do not have to worry about researching banks on a Lender List or picking a lender. The choice has been made for you.

For both FFELP and Direct Stafford loans, you will receive the actual loan disbursements from your college or graduate school.

Stafford Loan Limits

There are limits to how much you can borrow through the Stafford Loan program. These take into account both your subsidized and unsubsidized Stafford loans for a given school year. As you can see, these limits vary by your year in school and by your status as an independent or dependent student.

Stafford Interest Rates

The interest rate on the Stafford is set by the government. You don't have to worry that a poor credit score is going to result in a high interest rate. We've provided a year-by-year look at the Stafford interest rates over the next few years.

Upfront Fees on Stafford Loans

There are two types of fees you may see on Stafford loans: an Origination Fee and a Federal Default Fee. The origination fee is a fee charged by a lender to cover administrative costs for the loan. The origination fee is deducted from the principal. The federal default fee is intended to fund services to help student-loan borrowers who experience difficulty making their payments so they can avoid some of the expense and consequences of defaulting on their loans.

The origination fee on a Stafford loan can be up to 1.5%, and the federal default fee can be up to 1%. In some cases, the lender may choose to cover or waive the fee. When you see the term zero-fee loan, it is usually a reference to the fact that a borrower is not responsible for paying either of these upfront fees.