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Direct Stafford loans (subsidized) are student loans that, once you receive them, you must begin to repay, either while you are in school or after your grace period ends, once you have graduated. Students at all levels, from freshman on up, are eligible to apply and receive loan funding. Freshmen may receive up to $5,500. As you advance through school to a sophomore, junior, and senior you may be eligible for increased loan amounts.

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Before you apply, be sure you understand the differences between subsidized and unsubsidized loans. Subsidized loans are those for which the US government covers the interest for you during your time in school. The interest will also be covered during your grace period and for any deferment periods you request. Unsubsidized loans are those where you are responsible for covering every penny of the interest that begins to grow from the date of disbursement of your first loan until you pay it off.

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Stafford Loan Types

Both Direct Stafford loan types, subsidized and unsubsidized, are administered by the Department of Education. Each one is federally guaranteed and reserved only for students who are attending a college or university. Students who don’t have all the financial backup they need to go to school can apply for either of these loans. While financial need isn’t a requirement for approval for one of the loans, a loan can help students to pay for the costs of their education.

Federal financial aid has created the subsidized and unsubsidized loans for college students.

There are two main differences between a subsidized and an unsubsidized loan:

  • Subsidized loans are based on financial need. Because of this, interest will not accrue while the student is still in school; this is because the government is paying the interest.
  • Unsubsidized loans aren’t based on financial need; interest begins to accrue from the date of disbursement of each unsubsidized loan to the student.

Subsidized Loans

When you fill out your annual FAFSA, the Department of Education decides whether you are eligible to receive a Direct Stafford subsidized loan.

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To be eligible for a subsidized loan for every year you are in school, you must submit a FAFSA application every year. If you do qualify and you receive a loan, you are required to be in school a minimum of half-time. If the number of class credits you take falls below half-time, you will have to begin making monthly payments. If you are in school, enrolled in half-time to full-time hours, the federal government pays your monthly interest.


Unlike its subsidized counterpart, the unsubsidized loan doesn’t rely on financial need to be awarded. However, you still have to fill out a FAFSA for every year that you decide to apply for the Direct Stafford unsubsidized loan.

This loan is also different from the subsidized loan in that you are required to begin repaying interest as soon as the loan is disbursed. You may choose to hold off on making your interest payments until your grace period expires or during any periods of deferment you may request. Should you allow interest to accrue, it will capitalize (be added to the loan’s principal amount), causing additional interest to be charged.

How Do You Apply?

Just as you would for a grant, you need to submit your FAFSA to apply for a federal student loan. You will be told if you qualify for a need-based loan (subsidized). If grants, work-study, scholarships, and a subsidized loan aren’t enough, you can still apply for an unsubsidized Stafford loan. This loan application must be “over and above” any subsidized loan that you have been approved to receive.

Your financial aid office will advise you to choose a student loan lender. Once you have, and the loan(s) have been approved, you’ll have to complete student loan counseling and fill out the Master Promissory Note to get your Stafford loan. This note tells you all the details you need to know.

The direct loan for which you qualify should be included in a financial aid package before school begins. This way, you’ll have a better idea of the amount you should be receiving.

What are Your Interest Rates?

As of May 2019, federal student loan interest rates that apply after July 1, 2019 through July 1, 2020 are as follows:

  • Direct Subsidized (Undergraduate) 4.53%
  • Direct Unsubsidized (Undergraduate) 4.53%
  • Direct Unsubsidized (Graduate) 6.08%
  • Direct PLUS (Graduate and Parents) 7.08%

The change in federal student loan interest rates was changed, lowering the rates on May 8, 2019; the change was announced on May 13, 2019.

These interest rates are locked in and fixed for the life of the loan. This means that you won’t have to worry about interest rates changing annually. The 10-year Treasury note rate, plus a fixed percentage applying to the Stafford loan (unsubsidized, subsidized, and PLUS) all combine to determine the interest rates. Other types of student loans have their own interest rates set, and these may be higher or lower.

Are There Fees?

It should come as no surprise that, with a student loan, origination fees will be tacked on. A “loan origination fee” is the cost a bank charges to you for loaning their money to you for your educational costs. In short, yes, they are loaning money to you, but they want to ensure that they are making a good risk.

This fee is a percentage of your loan amount, and it comes straight off the top of the loan—you’ll notice this when you see the amount you receive at disbursement time. That fee is charged for every federal loan made to every student.

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Borrowing Limits for Stafford Loans

You do need to keep loan limits in mind as you apply. These are stepped according to your years in school:

  • Freshmen are limited to $5,500 if they are dependents; $9,500 if they are independent.
  • Sophomores are limited to $6,500 as dependents; $10,500 as independent students.
  • Juniors and later are limited to $7,500 as dependents; $12,500 as independent students.
  • Graduate and professional degree students: Receive $20,500 annually (either loan type).

The Department of Education has also established “career maximum loan amounts.” This sets the lifetime total that students may borrow, depending on their class. It also sets how many dollars of the student’s loans may be subsidized, as the government doesn’t want to be responsible for covering the interest payments for every undergraduate student in college throughout the country.

  • Dependent undergraduate students can borrow a max of $31,000, with $23,000 being subsidized.
  • A dependent student whose Parent PLUS loan application was denied can eventually borrow a total of $57,500, with $23,000 of that subsidized.
  • Independent undergraduate students can also borrow a max of $57,500, with a maximum of $23,000 being subsidized.
  • Graduate and professional degree students are able to borrow a career maximum limit of $138,500. This includes Direct loans used for undergraduate studies.

How are Funds Disbursed?

Disbursement for Direct Stafford subsidized loans works differently compared to how you receive money for grants or scholarships. The first time you receive funds from a Direct Stafford subsidized loan, you must receive mandatory entrance counseling. Once you have completed this counseling, the lender sends the funds to your school’s financial aid office. Entrance counseling may be in-person or online.

In this counseling, you find out the terms of your loan and requirements and conditions you have to satisfy. After this, you have to sign a Master Promissory Note (MPN), which will be recorded in your file before the funds are disbursed to your school.

Once you school receives the funds (completed in two installments, minimum), your school’s financial aid office will credit the funds as follows:

  • Tuition/fees
  • Room and board, for on-campus students
  • Other school charges (you give permission)

Remaining funds are provided to you by check, debit card, or EFT and can be used as you see fit.

Repayment Options for Stafford Loans

When you begin making loan payments, you should understand the repayment process. Before you make your first payment, you should log into your loan servicer’s website. Find out which loans you are making payments on and estimate what your monthly payments should be. This way, you can more easily budget them.

If you have found a job, signing up for automatic debit through your loan servicer makes it easier for you not to miss monthly payments. For Direct Loan customers, signing up for automatic debit also allows you to get an interest rate deduction of 0.25%.

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Find out who your loan servicer is so you can make payments directly to them. This would be a company like OSLA Servicing or Navient.

You have several repayment options:

  • Standard
  • Graduated
  • Pay as You Earn (PAYE)
  • Revised Pay as You Earn (REPAYE)
  • Income-Based Repayment (IBR)
  • IBR for New Borrowers
  • Income-Contingent Repayment (ICR)

What are Your Other Options?

You have other financial aid options, including scholarships and grants. If these don’t cover all education-related expenses, there are also other lending options on the table for you.

Federal student loans are student-friendly, with lower interest rates and no credit checks and you can consolidate these loans. Unsubsidized federal loans require you to begin paying interest when the money is disbursed to your student account. PLUS loans (student or parent) require you to go through a credit check. This is intended for graduate and professional students.

Parent PLUS loans are provided to parents (biological, stepparents, and adoptive) to help dependent undergraduates. Direct Consolidation Loans allow you to pool several loans into one loan with one servicer. Private student loans are made through private lenders but the loan terms are not always beneficial to students.

In-School loans are provided through the private marketplace, but you should research each lender carefully. Refinanced loans are an option for graduates, but these require a good credit score and steady income source.