Stafford Loans are loans from the federal government to cover personal higher education costs. Federal student loans can be used to cover tuition and fees as well as other expenses associated with the cost of attendance such as room and board, books, supplies and transportation. As of July 1, 2010, Stafford Loans are only available through the U.S. Department of Education’s Direct Loan Program.

Applying for Stafford Loans

Stafford Loans can be either subsidized or unsubsidized. Subsidized Stafford Loans are available only to students who qualify based on income. In order to receive any federal financial aid, students must complete the Free Application for Federal Financial Aid (FAFSA).

Subsidized Vs. Unsubsidized Loans

It is best to take a subsidized Stafford Loan, if you qualify, because interest on the loan is paid by the U.S. government during school, for six months after graduation and if your loan is deferred. If you are not eligible for a subsidized Stafford Loan or you need money beyond the borrowing limits, you can receive an Unsubsidized Stafford Loan. The borrower pays back all the interest and principal on this type of loan. Interest begins accruing when the loan is taken out and any interest is capitalized. Capitalization means any unpaid interest is added to the principal of the loan when you begin paying back the loan, (i.e., you will pay interest on interest). The interest rate on Unsubsidized Stafford loans is currently fixed at 6.8 percent.

Borrowing Limits

Borrowing limits on Stafford Loans increase with each year of enrollment. Independent students (for tax purposes) have higher borrowing limits than those who file as dependents. Graduate and professional degree students can borrow the most. Dependent students enrolled in a program that lasts at least a full academic year may borrow up to $5,500 in the first year, $6,500 in their second year and $7,500 for the remainder of their program. Independent students, enrolled in a program that lasts at least a full academic year may borrow up to $9,500 in year one, $10,500 in year two and $12,500 for the remainder of their program. Graduate and professional degree students may borrow up to $20,500 a year.

Repayment Timing

You are not required to repay your Unsubsidized Stafford Loan while you are enrolled in school full time, though interest will begin accruing. Repayment on Unsubsidized Stafford Loans begins six months after the borrower graduates, leaves school or is enrolled less than half-time.

Repayment Plans

The Direct Loan program offers several repayment options. Standard repayment is an even amount paid every month for up to 10 years (when the loan is paid off); the payment amount will not be less than $50. Extended repayment is available to borrowers with more than $30,000 in outstanding Direct Loan program loans. Payment is fixed or graduated over a period of up to 25 years. Graduated repayments increase every two years, so you can pay less while you are starting a career and earning less money. The payments on Income Based Repayment are capped to be affordable based on your income and family size. You are eligible only if your calculated payment amount is less than the standard, 10 year, repayment plan amount. The Income Contingent Repayment option is calculated annually to prevent your loan payments from causing financial hardship. The payment amount is based on your family adjusted gross income, family size and total Direct Loan amount.

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