Stafford Loan

A Stafford Loan is one of three types of loans made available to students by the federal government.  In fact, there are several forms of financial aid available to students and the Stafford loan is a true loan - that means the money is borrowed by the student and repayment is necessary - except under certain conditions, which we will talk about later.

Stafford Loan Process

Like many other federal loan programs, to qualify for a Stafford loan the student or a family member applies using the Free Application for Federal Student Aid or FAFSA process.  To complete this application, you will need certain records of your family's wealth including income tax returns, bank statements, mortgage records, and statements of stock, bonds, and other investment holdings.

After completing the application, the student is sent a Student Aid Report or SAR which restates the application information and contains the Expected Family Contribution.  The SAR is used by the financial aid office of the school you are attending or planning to attend to put together an Award Letter.

The Award Letter outlines the financial aid the college or university is willing to package for the student and the forms of aid.  If granted a Stafford loan, the student will need to complete a promissory note, which is a legal document promising repayment of the loan.

William D. Ford Direct Stafford Loan Program

Sometimes referred to simply as a Direct Loan, the William D. Ford Direct Stafford Loan Program offers the student low interest loans directly from the federal government.

Direct Student Loan Repayment Options

A Direct Loan offers four flexible repayment plans including:

• Standard Repayment - the student repays a fixed loan amount each month, at a minimum $50, and may take up to 10 years to repay the loan.  The length of repayment is determined by the fixed amount chose, the interest rate of the loan and the total loan amount.
• Extended Repayment - the student repays over a relatively long period of time, perhaps as much as 12 to 30 years.  Once again, the minimum monthly payment amount under this plan is $50.  Although you can lower your monthly payment by moving to an extended repayment plan, you will wind up paying more interest over the life of the loan.
• Graduated Repayment - this plan allows the student to start with a lower monthly payment and gradually increase the payment amount - usually every two years.  As is the case with the extended repayment program, the length of this loan can range from 12 to 30 years.
• Income Contingent Repayment - this allows the monthly payment to vary with a calculation that involves your annual income, number of family members and interest rate.  Basically, as the graduating student's income rises or falls, so do the monthly payments.  The interesting thing about this repayment schedule is that if after 25 years there is still a remaining balance on the loan it will be forgiven.  The one catch is that you will have to treat the forgiven loan as income and pay any taxes due.

FFEL Stafford Loan

FFEL is the second program under which a Stafford loan is made available to students.  Unlike Direct loans, the loan is not repaid to the federal government.  That means the repayment plans can vary considerably with each lending institution.  Generally, FFEL loans also include Standard and Graduated Repayment plans. They may also offer an income sensitive plan as described below:

• Income Sensitive Repayment - monthly payments are based on annual income and the total loan outstanding and rise and fall with income levels.  There is no $50 minimum monthly payment amount; however, each payment must be equal to or greater than the interest accruing on the loan each month.

Stafford Eligibility and Loan Amounts

Direct and FFEL Stafford Loans are targeted to both undergraduate and graduate students. In addition, the loans to the student take one of two forms:

• Subsidized Loan - this type of loan is awarded on the basis of demonstrated financial need. The student is not charge any interest on the outstanding loan amount until repayment begins.  These are referred to as subsidized loans because the federal government "subsidizes" the interest payable on the loan until payments begin.
• Unsubsidized Loan - this type of loan is not awarded on the basis of demonstrated financial need.  That mean interest will begin accruing once the loan is paid to the educational institution.  Effectively, this means that the interest expense is added to the principal of the loan.

To receive financial aid from the federal government, generally, the student must have a Social Security number, be enrolled or accepted for enrollment as a regular student working toward a degree or certificate in an eligible program.  The student must also possess a high school diploma or a General Education Development (GED) Certificate.

The loan limits for a Stafford Loan depends on the student's status and whether or not they are a dependent student:

Stafford Loan Limits

Interest Rates on Stafford Loans

For Stafford loans disbursed beginning July 1, 2007, the interest rate is fixed at 6.80%.   Loans disbursed before July 1, 2006 offered a variable rate of interest which is adjusted annually on July 1, and capped at 8.25%.  The current rate of interest on these variable rate loans through June 30, 2008 is 7.22% during repayment and 6.80% during in-school, grace, and deferment.

Stafford Loan Fees

For Stafford loans first disbursed between July 1, 2007 and June 30, 2008 the fees can be up to 4%.  This includes a 2% federal origination fee plus a 2% federal default fee.  There are many lenders that work with Sallie Mae to pay all or a portion of these loan fees.

Stafford Loan Tax Incentives

Finally, there are tax benefits for many of the expenses associated with higher education.  This tax break applies to students and loans taken out to pay for postsecondary and secondary education.  Certain IRS rules do apply and the current maximum deduction is $2,500 annually.

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