The U.S. Department of Education administers the old Federal Family Education Loan (FFEL) Program and the William D. Ford Federal Direct Loan Program. Both the FFEL and Direct Loan programs consist of what are generally known as Stafford Loans (for students), Direct PLUS Loans for Parents and Direct PLUS Loans for Graduate and Professional Students. There are also Federal Direct Consolidation Loans which help people manage their debt after graduation.
All schools now participate in the Direct Loan Program but at one point, some participated in both. Under the Direct Loan Program, the funds for your loan come directly from the federal government. Eligibility rules and loan amounts are identical under both programs, but repayment plans differ somewhat.
In order to apply for a Stafford loan, you must first complete the Free Application for Federal Student Aid (FAFSA). The FAFSA is used to apply for all types of federal student aid and serves as your application for the Stafford loan program as well.
All colleges and universities are now Direct Loan schools. Your school will provide all the necessary instructions for you to obtain your Stafford loan. There are no choices of providers. Back when the FFEL program existed, you had to choose a lender for your loan and schools generally presented a list of lenders from which to choose. However, students could ignore the list and were free to choose any lender that participated in the FFEL program. The “Preferred Lender List” was simply provided to you as a convenience as hundreds of lenders offered Stafford loans.
Once you have received approval from the Direct Loan Program, you will also need to sign a master promissory note (MPN). The promissory note is your legally binding agreement to repay your loan. Be sure to also read the “Borrower’s Rights and Responsibilities” which should be part of the loan package. Your school will also conduct an “Entrance Interview” that you must complete in order to receive your loan proceeds. The Entrance Interview will be conducted in-person or online and is an informational session to ensure you understand your rights and responsibilities connected with borrowing a federal loan. The session will likely last no more than 20-30 minutes.
Your school will determine your eligibility for either a Subsidized and/or Unsubsidized Stafford loan. “Subsidized” means the government pays the interest on your loan while you are in school at least half-time and during periods of deferment depending on your financial need. “Unsubsidized” means you are responsible for either making interest-only payments on your loan while you are in school or allowing the interest to be capitalized (allowing the interest to be added to your loan principal) while you are in school. Interest on Unsubsidized Stafford loans accrues daily.
Stafford Loan Limits
Stafford loans have fixed maximums based on your year in school. If you’re a dependent undergraduate student, each year you can borrow up to (for the 2011-2012 academic year):
- $5,500 if you’re a first-year student enrolled in a program of study that is at least a full academic year (no more than $3,500 of this amount may be in subsidized loans).
- $6,500 if you’ve completed your first year of study and the remainder of your program is at least a full academic year (no more than $4,500 of this amount may be in subsidized loans).
- $7,500 if you’ve completed two years of study and the remainder of your program is at least a full academic year (no more than $5,500 of this amount may be in subsidized loans).
If you’re an independent undergraduate student or a dependent student whose parents have applied for but were unable to get a Direct PLUS Loan for Parents, each year you can borrow up to:
- $9,500 if you’re a first-year student enrolled in a program of study that is at least a full academic year (no more than $3,500 of this amount may be in subsidized loans).
- $10,500 if you’ve completed your first year of study and the remainder of your program is at least a full academic year (no more than $4,500 of this amount may be in subsidized loans).
- $12,500 if you’ve completed two years of study and the remainder of your program is at least a full academic year (no more than $5,500 of this amount may be in subsidized loans). This amount remains unchanged for both academic years.
If you are a graduate student each year you can borrow up to $20,500 of which not more than $8,500 may be subsidized.
You cannot borrow more than your cost of attendance (determined by your school) minus other financial aid including other loans. As a result, the amount you may borrow could be less than the maximums listed above. The amount you can borrow will be communicated to you by your school. This communication usually comes in the form of an “award letter” that list all of the assistance for which you qualify through your school. You may accept up to the full amount of Stafford loan offered or request a reduction if you do not require the full amount.
The interest rate on all Stafford loans disbursed after July 1, 2006 is fixed at 6.8%. However, the interest rate on the subsidized portion for the 2011-2012 academic year is 3.4%. (It was 4.5% for 2010-2011 and 5.60% for 2009-2010.) You may be charged fees up to 1%.
You will not have to begin repayment of your Stafford loan until 6 months after you graduate, leave school or drop below half-time attendance.
There are six different repayment plans available:
- Standard – even monthly payments over a ten year period.
- Extended – even monthly payment over a 12-30 year period depending upon the total amount you borrow.
- Graduated – payments start out low, and then increase in stages. You can generally take from 12 to 30 years to repay your loan. The length of your repayment period will depend on the total amount you owe when your loan goes into repayment. However, you will pay more in interest over the life of the loan than the standard repayment plan.
- Income Based Repayment-takes into account your income and family size and will adjust payments according to those factors. For more info, go here:
- Income Sensitive – monthly payment is based on your yearly income and your loan amount. As your income increases or decreases, so do your payments. Each payment must at least equal the interest accrued on the loan between scheduled payments, and no scheduled payment amount can be more than three times greater than any other scheduled payment amount. You may take from 12 to 30 years to repay your loan depending on the total amount you have borrowed.
- Income Contingent — monthly payment plan only offered by the Direct Loan Program. Payments are based on a borrower’s adjusted gross income (AGI), including any spousal income, family size, and loan amount. The monthly amount can change annually.
Remember, borrow only what you need and compare your options to make sure you get the loan that’s right for you.