A Stafford Loan was one of three types of loans made available to students by the federal government. There are several forms of financial aid available to students and not all are loans, but a Stafford loan was money borrowed by the student, and repayment is necessary; except under certain conditions.
Note: As a result of the Health Care and Education Reconciliation Act of 2010, FFEL Stafford Loans are no longer made by private lenders. Instead, all new federal student loans come directly from the U.S. Department of Education under the Direct Loan Program. This article preserves information for former students in repayment.
Stafford Loan Process
Like many other federal loan programs, to qualify for a Stafford loan, the student or a family member fills out the Free Application for Federal Student Aid or FAFSA. To complete this application, certain records of a family's wealth are needed, including income tax returns, bank statements, mortgage records, and statements of stocks, bonds, and other investment holdings.
After completing the application, the student is sent a Student Aid Report, or SAR, which restates the application information and contains the Expected Family Contribution. The SAR is used by the financial aid office of a school to put together an Award Letter.
The Award Letter outlines the financial aid the college or university is willing to package for the student as well as the forms of aid. If granted a Stafford loan, the student will need to complete a promissory note, which is a legal document promising repayment of the loan.
William D. Ford Direct Stafford Loan Program
Sometimes referred to simply as a Direct Loan, the William D. Ford Direct Stafford Loan Program offered students low interest loans directly from the federal government.
Direct Student Loan Repayment Options
A Direct Loan offers four flexible repayment plans, including:
- Standard Repayment: the student repays a fixed loan amount each month, at a minimum $50, and may take up to 10 years to repay the loan. The length of repayment is determined by the fixed amount chosen, the interest rate of the loan, and the total loan amount.
- Extended Repayment: the student repays over a relatively long period of time, perhaps as much as 12 to 30 years. Once again, the minimum monthly payment amount under this plan is $50. Although it's possible to lower monthly payments by moving to an extended repayment plan, the borrower will wind up paying more interest over the life of the loan.
- Graduated Repayment: this plan allows the student to start with a lower monthly payment and gradually increase the payment amount, usually every two years. As is the case with the extended repayment program, the length of this loan can range from 12 to 30 years.
- Income Contingent Repayment: this allows the monthly payment to vary with a calculation that involves annual income, number of family members, and interest rate. As the graduating student's income rises or falls, so do the monthly payments. If there is still a remaining balance on the loan after 25 years, the remaining principal on the loan will be forgiven. Unfortunately, the forgiven loan amount needs to be treated as income, and federal income taxes will apply.
FFEL Stafford Loan
As mentioned earlier, the Health Care and Education Reconciliation Act of 2010 eliminated Stafford Loans made by private lenders. Instead, all new federal student loans come directly from the U.S. Department of Education under the Direct Loan Program.
Stafford Eligibility and Loan Amounts
Direct Stafford Loans were targeted to both undergraduate and graduate students. In addition, the loans to the student took one of two forms:
- Subsidized: this type of loan was awarded on the basis of demonstrated financial need. The student was not charged any interest on the outstanding loan amount until repayment begins. These were referred to as subsidized loans because the federal government "subsidizes" the interest payable on the loan until payments begin.
- Unsubsidized: this type of loan was not awarded on the basis of demonstrated financial need. That means interest began accruing once the loan was disbursed to the educational institution. Effectively, this means the interest expense was added to the principal of the loan.
To receive financial aid from the federal government, generally, the student must have a Social Security number, be enrolled or accepted for enrollment as a regular student working toward a degree or certificate in an eligible program. The student must also possess a high school diploma, or a General Education Development (GED) Certificate.
The limits for a Stafford Loan depended on the student's status, and whether or not they were a dependent student:
Stafford Loan Limits
Interest Rates on Stafford Loans
For Stafford loans, the interest rate is fixed at 4.53%. Loans disbursed before July 1, 2006 offered a variable rate of interest which is adjusted annually on July 1, and capped at 8.25%.
Stafford Loan Fees
For Stafford loans, the fees can be up to 4.00%. This includes a 2.00% federal origination fee plus a 2.00% federal default fee. There are many lenders that work with Sallie Mae to pay all or a portion of these loan expenses.
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