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If college savings, scholarships and grants aren't enough to pay for school, student loans can help cover college expenses to help you earn a degree. Direct Stafford loans are a type of federal student loan that can provide a low-interest way to finance education costs. Read on to learn what a direct Stafford loan is, how much you can borrow and how to apply.
What Is a Stafford Loan?
"Direct Stafford loan" is a term sometimes used when referring to direct subsidized loans or direct unsubsidized loans in the William D. Ford Federal Direct Loan (Direct Loan) Program, though Stafford is not part of these loans' official names.
Direct subsidized loans and direct unsubsidized loans are types of student loans offered to students who need help paying for tuition and college expenses. Depending on the type of loan, they are available to undergraduate, graduate and professional students. To apply, you must complete the Free Application for Federal Student Aid (FAFSA).
Applying for the FAFSA is free, and if you qualify, your school will notify you of the loan amounts you're eligible for and whether you can take out a subsidized or unsubsidized loan.
Unsubsidized vs. Subsidized Stafford Loans
Direct subsidized loans and unsubsidized loans must be paid back with interest, but when the interest starts to accrue differs by loan type.
- Subsidized loans: The U.S. Department of Education covers interest while you're in school (while attending at least half-time), during the grace period after you leave school and during deferment periods. Subsidized loans are for undergraduates who demonstrate a financial need.
- Unsubsidized loans: Borrowers have to pay all the interest that accrues from the date loans are disbursed until the loan principal and interest are paid in full. Unsubsidized loans are an option for both undergraduate and graduate students, and eligibility for unsubsidized loans is not based on financial need.
Direct Loan Limits
The amount you can borrow with a direct Stafford loan varies by loan type. The annual borrowing limit also depends on your school year and your dependency status. The following tables show the annual and aggregate limits for unsubsidized and subsidized loans for dependent and independent students as determined by the U.S. Department of Education. Unsubsidized loan limits include any subsidized loans you receive.
| Subsidized Loan Limits | ||
|---|---|---|
| Year | Dependent Students | Independent Students |
| First-year undergraduate annual loan limit | $3,500 | $3,500 |
| Second-year undergraduate annual loan limit | $4,500 | $4,500 |
| Third-year undergraduate and beyond annual loan limit | $5,500 | $5,500 |
| Graduate student annual loan limit | Not Applicable | Not Applicable |
| Unsubsidized aggregate loan limit | $23,000 | $23,000 for undergraduate students and $65,500 for graduate and professional students |
| Unsubsidized Loan Limits* | ||
|---|---|---|
| Year | Dependent Students | Independent Students |
| First-year undergraduate annual loan limit | $5,500 | $9,500 |
| Second-year undergraduate annual loan limit | $6,500 | $10,500 |
| Third-year undergraduate and beyond annual loan limit | $7,500 | $12,500 |
| Graduate student annual loan limit | Not Applicable | $20,500 |
| Unsubsidized aggregate loan limit | $31,000 | $57,500 |
*Includes subsidized loans
Pros and Cons of Direct Stafford Loans
If you're thinking about borrowing money to pay for school, these are the pros and cons of using direct loans:
Pros
- Loans offer low and fixed interest rates. The government sets interest rates for the direct loan program, and rates currently start as low as 5.50% on direct subsidized loans and direct unsubsidized loans for undergraduate student borrowers.
- Payments aren't required during school or right after graduation. Students don't have to make loan payments while pursuing a degree, and borrowers get a six-month grace period after leaving school before loan payments are due.
- Loans don't require a credit check. Students don't have to undergo a credit review for direct subsidized loans and direct unsubsidized loans making them easy to qualify for.
Cons
- There are strict annual borrowing limits. Loans have annual and aggregate loan limits that may not be enough to pay for your entire college education. Applying for grants, scholarships and private student loans could help fill in any expense gaps.
- Loans have origination fees. Direct subsidized loans and direct unsubsidized loans paid out before October 1, 2024, have a 1.057% origination fee. This fee is subtracted from the loan proceeds before funds are disbursed.
- Defaulting can have major consequences. Unlike grants, federal loans are a type of financial aid you have to pay back unless you qualify for loan forgiveness. And if your loan goes into default due to nonpayment, your wages could be garnished.
How to Qualify for a Direct Stafford Loan
Subsidized loans are offered to undergraduate students based on financial need. Schools determine your financial need by comparing the cost of school attendance against how much your family can contribute.
Unsubsidized loans are a type of aid where your family contribution isn't factored into how much you can borrow. Instead, the cost of attendance and other financial aid you're awarded is considered to determine funding.
How to Apply for a Direct Stafford Loan
Applying for a direct Stafford loan starts with determining if you meet qualification criteria and then you must complete the FAFSA. Below are the steps to follow:
- Review eligibility requirements. You must be a U.S. citizen or eligible non-citizen to qualify for financial aid. You must also enroll at least half-time in a school program that leads to a degree or certificate. To maintain eligibility once you get funding, you have to stay in good academic standing.
- Fill out the FAFSA. You can fill out the FAFSA form annually at StudentAid.gov. The form asks for financial information about the student seeking financial aid (and the parent if the student is a dependent). To make the application process easier, you can sync tax information from tax documents to your form.
- Review loan options. After submitting your FAFSA, you'll receive aid offers from schools listed in your application, which may include grant money, work-study programs and loan funds. Subsidized loans are the best type of loan to take out first since interest doesn't start accruing right away. After using up subsidized loan funding, you could turn to unsubsidized loans to pay for additional education costs.
- Accept your loans. The final step is signing the loan promissory note, which means you agree to loan terms. The first time you take out federal student loans, you're also required to complete entrance counseling that explains the financial responsibility of borrowing. Loan funds are then disbursed, and money often gets applied directly to tuition and fees.
What Is the Interest Rate for a Stafford Loan?
Interest rates can change every school year and vary by loan type and the type of degree you're pursuing.
- Subsidized and unsubsidized student loans for undergraduates disbursed on or after July 1, 2023, and before July 1, 2024, have an interest rate of 5.50%.
- Unsubsidized student loans for graduate and professional students disbursed after July 1, 2023, and before July 1, 2024, have an interest rate of 7.05%.
The Bottom Line
When you need to borrow money for school, federal loans are the first option to pursue because they can provide low interest rates and borrower benefits like forbearance or deferment when you face financial hardship.
If you use up federal student loan funds available to you, you could look into private student loans with private lenders for additional funding. Using Experian's comparison tool, you can receive student loan offers to compare rates and terms from multiple lenders at once.