What Are Stafford Loans?

Stafford Loans are Federal student loans that allow you to borrow money for the cost of college. These loans are among the most common student loans made to undergraduate and graduate students.

Compared to other forms of borrowing, Stafford Loans, especially subsidized loans, can be a good way to borrow money for your education.

If you took out a Stafford Loan (or a “Direct” loan) to pay for your education, it’s important to understand what you borrowed, and how to pay it back.

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What Are Stafford Loans?

Stafford Loans are Direct Subsidized and Unsubsidized Federal student loans that most U.S. students can use to pay for qualified educational programs.

To qualify for a Stafford Loan, you must fill out the Free Application for Federal Student Aid (FAFSA). Direct Loans (along with interest rates and fees) will be included in your award package. You may choose to accept or decline these loans.

If you choose to accept the loan, you’ll complete entrance counseling to be sure you understand the terms of the loan (and repayment), and you’ll sign a Master Promissory Note that outlines the exact terms of your loan.

Unfortunately, most people I know who went through the counseling didn’t really understand how the loan worked. Or perhaps they understood the math, but when you’re 18 years old, the consequences of taking on debt aren’t totally clear. If you took on debt as an undergraduate (or as a graduate student), it’s likely you took out a Stafford Loan (now called a Direct Loan).

Stafford Loans, unlike other loan types, also have student loan borrowing limits. These limits are very low for undergraduate students, which can pose an issue.

Do I Have To Repay A Stafford Loan?

As with every student loan, you are responsible to pay a Stafford Loan. Stafford Loans can have repayment periods lasting from 10 to 25 years. The standard repayment period is 10 years, but you can consolidate the loans which gives you a longer repayment period.

Additionally, if you’re struggling to repay the debt, you can opt to put your loans on an income-driven repayment plan (such as PAYE, Income-Based Repayment, SAVE, or Income-Contingent Repayment).

As long as you do not refinance a Stafford Loan, the loan is eligible for Public Service Loan Forgiveness (PSLF) if you work in a qualifying occupation (and maintain a qualifying repayment plan).

Direct Loans are also discharged after 25 to 30 years of timely repayment no matter what your occupation is. However, the discharge may come with a tax bomb because you will owe taxes on the amount discharged.

What Are the Interest Rates And Fees On Stafford Loans?

The exact interest rates on Stafford Loans depend on when you took out the loans. These are the current interest rates for the various types of loans.

With subsidized loans, the Department of Education pays your interest while you’re in school (more than half-time), during a six-month grace period following graduation, and during select deferments. That means your loan balance won’t grow during those times.

By contrast, you are responsible for interest that accrues on unsubsidized loans. That means even though you don’t have to make payments during school (or during your six-month grace period), your loan balance will continue to grow.

As a rule of thumb, always take subsidized loans before taking unsubsidized loans if you're offered them.

Here are the current interest rates on Stafford Loans for the 2023 - 2024 school year:

Stafford Loan borrowers also pay upfront loan fees. These are subtracted from the amount disbursed by the school. These are the fees for the two most recent school years. Your actual upfront fee depended on when you took out the loan.

Should I Take Out A Stafford Loan?

As a college or graduate student, you need to pay for your education somehow. Before taking on debt, look for options to pay your way through school.

Many people can work part-time or even full-time during their undergraduate careers. The earnings from your work combined with scholarships and frugal living may make it possible to avoid undergraduate debt.

But if you can’t avoid debt, a Stafford Loan is a good option. You will have several repayment options when you graduate, and the interest rate is reasonable.

Graduate students (especially law students or medical students) don’t always have as many opportunities to work. If you can fund your education through scholarships, work as a teacher’s assistant, or work as a research assistant, this is ideal.

However, if that doesn’t work, a Stafford Loan is a good first option for borrowing. Just be sure to understand your repayment options (and your salary expectations) before taking it out.

Stafford Loan Alternatives

While the Stafford Direct Loan is the most common student loan, there is another alternative - the PLUS Loan. The PLUS loan program is different in that you are allowed to borrow up to the full cost of attendance.

There are two PLUS programs: Grad PLUS loans and Parent PLUS loans. Just like it sounds, Grad PLUS Loans are offered to graduate and professional students, and parent PLUS loans are offered to parents.

The other main alternative is private student loans. Sometimes these are supplemental to Stafford loans, due to the low borrowing limits.

Bottom Line

Direct student loans are an important way to fund university education in the United States. But it’s still important to be careful with borrowing and to consider repayment options.

If you took out a Stafford Loan, take the time to study your repayment options. If necessary, get on a repayment plan, so the loans don’t interfere with your financial health. In time, you may have sufficient income to attack the loans and get rid of them once and for all.