Tuesday, January 29, 2013

Understanding Federal Stafford Loans for College

A Stafford Loan is the most popular federal student loan. According to the College Board, for the 2010/2011 school year (the latest year for which statistics are available), more than $85 billion in Stafford Loans was handed out to students. Here are the highlights of this popular student loan.

Subsidized vs. unsubsidized

There are two types of Stafford Loans--subsidized and unsubsidized. What's the difference? With a subsidized loan, the government pays the interest that accrues on the loan while the student is in school, during any deferment periods, and for six months after graduation. With an unsubsidized loan, the student is responsible for paying the interest that accrues during these periods.

Subsidized Stafford Loans are available only to undergraduate students with financial need. Unsubsidized Stafford Loans are available to both undergraduates and graduate students, and aren't based on financial need. Subsidized Stafford Loans are the more popular type.

Interest rates

The interest rate a student will pay depends on whether the loan is subsidized or unsubsidized. For unsubsidized Stafford Loans, the interest rate on new loans is fixed at 6.8%. For subsidized Stafford Loans, the interest rate is fixed as follows:

  • 3.4% for loans issued 7/1/11 through 6/30/13
  • 4.5% for loans issued 7/1/10 through 6/30/11
  • 5.6% for loans issued 7/1/09 through 6/30/10
  • 6.0% for loans issued 7/1/08 through 6/30/09
  • 6.8% for loans issued 7/1/06 through 6/30/08
Note:   The 3.4% rate on subsidized Stafford Loans currently in effect is scheduled to increase to 6.8% on July 1, 2013.

For borrowers who have an older Stafford Loan--subsidized or unsubsidized--that was issued July 1, 1988, through June 30, 2006, the interest rate is variable. It is automatically adjusted each July (along with your monthly payment), and can't exceed 8.25%.

In addition to interest charges, there is a 1% loan fee on all new subsidized and unsubsidized Stafford Loans.

Borrowing limits

Stafford Loans have annual borrowing limits. Surprisingly, despite the steady increase in college costs, these limits have changed very little over the past decade. Here are the limits for dependent undergraduate students:

  • 1st year: $5,500 (no more than $3,500 in subsidized loans)
  • 2nd year: $6,500 (no more than $4,500 in subsidized loans)
  • 3rd through 5th year: $7,500 per year (no more than $5,500 in subsidized loans)
  • Total: $31,000

Here are the limits for graduate students:

  • $20,500 per year (unsubsidized loans only)
  • Total (includes undergraduate): $138,500


All Stafford Loans must be obtained directly from the federal government. (In the past, one could go through either the government or a private lender who participated in the government's education loan program.) To apply for a Stafford Loan, students must complete the federal government's financial aid application, the FAFSA. Family income and asset information provided on the FAFSA will be used to determine whether the student qualifies for a subsidized Stafford Loan, and other financial aid as well.

Stafford Loans are generally included as part of a student's financial aid package. If this is your child's first time receiving a Stafford Loan, he or she will be required to complete entrance counseling (to help understand his or her obligation to repay the loan) and sign a promissory note agreeing to the terms of the loan. For more information on the process, including dates and timelines, contact the financial aid office at the school your child is planning to attend.

The LWP Group is Here to Help

At the LWP Group, we're here to help you with all your college planning needs, including how best to incorporate Stafford Loans into your College Planning package, gifting and many other options. Visit our website www.TheLWPGroup.com or simply give us a call with any questions you may have. (734) 424-1700