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Stafford loans are the single largest source of federal financial assistance for students pursuing postsecondary education. According to the U.S. Department of Education, over $100 billion in new loans will be issued through the program in 2020 alone.

If you’re planning to attend college or graduate school, Stafford loans should be the first loans you turn to since they usually have lower interest rates and more favorable repayment terms and protections than other student loans. Here’s how they work.

What Is a Direct Stafford Loan?

When it comes to federal student loans, there is only one loan program active right now: direct loans. However, some people refer to direct loans as direct Stafford loans or Stafford loans, which can cause you to think there are multiple loan programs.

Direct Stafford loans are part of the William D. Ford Federal Direct Loan Program, which issues low-interest loans to students who need help covering the cost of their education. Founded in 1994, loans issued through the direct loan program are available to both undergraduate and graduate students attending four-year colleges, community colleges or trade schools.

There are four different types of direct loans:

  • Subsidized direct loans. For undergraduate students with exceptional financial need
  • Unsubsidized direct loans. For graduate and undergraduate students no matter their financial situation
  • PLUS loans. For parents of undergraduate students who want to borrow money to pay for their education; also available for graduate students
  • Direct consolidation loans. For parents and students who want to consolidate their loans

What’s the Difference Between a Subsidized and Unsubsidized Direct Loan?

For undergraduate students, there are two main options: subsidized and unsubsidized loans. But what’s the difference? Depending on which loan you qualify for, you could save money over the course of your repayment period.

Subsidized Direct Loans

Subsidized loans are only available to undergraduate students with financial need. The U.S. Department of Education covers the interest that accrues on the loans while you’re in school at least half-time, during your grace period after graduation and during periods of deferment. Because the government is paying some of your interest charges, subsidized loans are less expensive than unsubsidized direct loans.

Unsubsidized Direct Loans

Unsubsidized direct loans are available to all undergraduate and graduate students, regardless of financial need. While you don’t have to make payments while you’re in school, interest will start accruing immediately, and you’re responsible for paying all interest charges.

Direct Loan Eligibility

To qualify for a direct loan, you must:

  • Enroll at least half-time at a school that participates in the direct loan program
  • Submit the Free Application for Federal Student Aid, or FAFSA
  • Be a U.S. citizen or eligible noncitizen (including U.S. nationals and permanent residents)
  • Have a valid Social Security number
  • Register with the Selective Service (if you are a male)
  • Maintain satisfactory academic progress, meaning you’re making progress toward your degree
  • Have a high school diploma or GED—or have a high school education equivalent from homeschooling

Stafford Loan Rates and Fees

[Note: As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, federal direct loan payments are suspended until Dec. 31, 2020, and the interest rates are set at 0%]

Direct loans tend to have lower interest rates than other forms of student loans. For loans issued between July 1, 2020, and June 30, 2021, the following interest rates apply:

  • Direct subsidized: 2.75%
  • Direct unsubsidized: 2.75% for undergraduate borrowers, 4.30% for graduate borrowers
  • Direct PLUS: 5.30%
  • Direct consolidation: Based on the weighted average of your existing loans

Stafford Loan Origination Fees

Most federal loans charge disbursement fees that are a percentage of your loan amount. The fee is deducted from each loan you take out, meaning you’ll receive less money overall.

For loans issued between July 1, 2020, and June 30, 2021, the following disbursement fees apply:

  • Direct subsidized and unsubsidized: 1.057%
  • Direct PLUS: 4.228%

Let’s say you took out a $10,000 direct parent PLUS Loan. Before the loan is disbursed, the U.S. Department of Education would deduct 4.228% of the loan amount—$422.80—and you would receive $9,577.20 to cover your education costs.

Stafford Loan Borrowing Limits

With most federal loans, there are caps on how much you can borrow each year. The borrowing limits vary based on your grade level and dependency status. Generally, you’re considered independent if you’re over 24 years old, married, a graduate or professional student, a veteran or in the military.

Undergraduate Borrowing Limits

Graduate Borrowing Limits

Parent Borrowing Limits

With Parent PLUS Loans, parent applicants can borrow up to 100% of the total cost of attendance at their child’s selected school.

Stafford Loan Benefits

If you need money to pay for school, federal Stafford loans are a good place to start. Not only do they have lower interest rates than most private student loans, but they have other benefits that can make managing your debt easier.

Income-Driven Repayment Plans

Direct Stafford loans are the only federal loans eligible for income-driven repayment (IDR) plans. If you enroll in an IDR plan, your loan servicer sets your monthly loan payment at a percentage of your discretionary income and extends your repayment term. Depending on your income and family size, you could qualify for a much lower monthly payment than you currently have.

Public Service Loan Forgiveness

If you have federal direct loans and work for a non-profit organization or government agency, you may qualify for Public Service Loan Forgiveness (PSLF). With PSLF, you can qualify for loan discharge after working for an eligible employer for 10 years while making 120 monthly payments. Only Stafford loan borrowers are eligible for PSLF.

Forbearance and Deferment

With direct loans, you may temporarily postpone your payments—without becoming delinquent or entering student loan default—if you’re eligible for federal forbearance or deferment. Depending on your situation, you may be able to pause payments for up to 12 months at a time, giving you time to recover from financial issues or medical emergencies.

Other Funding Options

While Stafford loans are less expensive than other student loans, they do have annual and aggregate borrowing limits. If you reach the loan cap and still need additional money to pay for school, private student loans can be a useful option. Check out the best private student loan lenders to see what loans are available.