Federal Loans
Many students rely on federal government loans to finance their educations. These loans have low interest rates and do not require credit checks or collateral. Student loans also provide a variety of deferment options and extended repayment terms. Student loans include the Federal Stafford and Federal Perkins Loans.
Stafford Loan
The main federal loan for students is called the Stafford Loan and has two variations:
- Federal Family Education Loan Program (FFELP) loans are provided by private lenders, such as banks, credit unions and savings & loan associations. These loans are guaranteed against default by the federal government.
- Federal Direct Student Loan Program (FDSLP) loans, administered by “Direct Lending Schools”, are provided by the US government directly to students and their parents.
All Stafford Loans are either subsidized (the government pays the interest while you’re in school) or unsubsidized (you pay all the interest, although you can have the payments deferred until after graduation). To receive a subsidized Stafford Loan, you must be able to demonstrate financial need. About 2/3 of subsidized Stafford loans are awarded to students with family AGI of under $50,000, 1/4 to students with family AGI of $50,000 to $100,000, and a little less than 10% to students with family AGI over $100,000.
With the unsubsidized Stafford loan, you can defer the payments until after graduation by capitalizing the interest. This adds the interest payments to the loan balance, increasing the size and cost of the loan. All students, regardless of need, are eligible for the unsubsidized Stafford Loan.
Repayment begins six months after the student graduates or drops below half-time enrollment. The standard repayment term is 10 years, although one can get access to alternate repayment terms (extended, graduated and income contingent repayment) by consolidating the loans.
Stafford Loan Limits
The following chart illustrates the annual and aggregate loan limits for the subsidized and unsubsidized Stafford loans first disbursed on or after July 1, 2008.
The limits may be a little confusing because there are two sets of limits for the Stafford loan: a combined base limit for the subsidized and unsubsidized Stafford loan, and an additional limit for just the unsubsidized Stafford loan. In effect, the subsidized Stafford loan is limited to the amounts in the “Combined Base Limit” column and the unsubsidized Stafford loan is limited to the amounts in the “Total Limit” column minus the amount of any subsidized Stafford loans.
Many students combine subsidized loans with unsubsidized loans to borrow the maximum amount permitted each year.
Note also that there are separate limits for dependent undergraduate students, independent undergraduate students, graduate and professional students, and medical school students. Dependent undergraduate students whose parents have been denied a Parent PLUS loan are eligible for the higher unsubsidized Stafford loan limits available to independent undergraduate students.
Annual Loan Limits – Stafford Loan
| Dependent Students (whose parents were not denied a PLUS loan) | Combined Base Limit for Subsidized and Unsubsidized Loans | Additional Limit for Unsubsidized Loans | Total Limit for Unsubsidized Loans (minus subsidized amounts) |
|---|---|---|---|
| First-Year Undergraduate (Freshman) | $3,500 | $2,000 | $5,500 |
| Second-Year Undergraduate (Sophomore) | $4,500 | $2,000 | $6,500 |
| Third-Year and Beyond Undergraduate (Junior, Senior) | $5,500 | $2,000 | $7,500 |
| Preparatory Coursework (for enrollment in an undergraduate program) | $2,625 | $0 | $2,625 |
| Preparatory Coursework (for enrollment in a graduate or professional program) | $5,500 | $0 | $5,500 |
| Teacher Certification Coursework | $5,500 | $0 | $5,500 |
| Independent Students (and dependent students whose parents were denied a PLUS loan) | Combined Base Limit for Subsidized and Unsubsidized Loans | Additional Limit for Unsubsidized Loans | Total Limit for Unsubsidized Loans (minus subsidized amounts) |
| First-Year Undergraduate (Freshman) | $3,500 | $6,000 | $9,500 |
| Second-Year Undergraduate (Sophomore) | $4,500 | $6,000 | $10,500 |
| Third-Year and Beyond Undergraduate (Junior, Senior) | $5,500 | $7,000 | $12,500 |
| Preparatory Coursework (for enrollment in an undergraduate program) | $2,625 | $6,000 | $8,625 |
| Preparatory Coursework (for enrollment in a graduate or professional program) | $5,500 | $7,000 | $12,500 |
| Teacher Certification Coursework | $5,500 | $7,000 | $12,500 |
| Graduate and Professional Students | Combined Base Limit for Subsidized and Unsubsidized Loans | Additional Limit for Unsubsidized Loans | Total Limit for Unsubsidized Loans (minus subsidized amounts) |
| Graduate and Professional Students | $8,500 | $12,000 | $20,500 |
| Medical School Students | $8,500 | $32,000 | $40,500 |
Aggregate Loan Limits – Stafford Loan
| Combined Base Limit for Subsidized and Unsubsidized Loans | Additional Limit for Unsubsidized Loans | Total Limit for Unsubsidized Loans (minus subsidized amounts) | |
|---|---|---|---|
| Dependent Undergraduate Students (whose parents were not denied a PLUS loan) | $23,000 | $8,000 | $31,000 |
| Independent Undergraduate Students (and dependent students whose parents were denied a PLUS loan) | $23,000 | $34,500 | $57,500 |
| Graduate and Professional Students | $65,500 (including undergraduate Stafford loans) | $73,000 | $138,500 |
| Medical School Students (Effective 4/18/08 per DCL GEN-08-04) | $65,500 (including undergraduate Stafford loans) | $158,500 | $224,000 |
Stafford Loan Interest Rates and Fees
Stafford Loans have a fixed interest rate of 6.8% for loans with a first disbursement after July 1, 2006. (Previously, Stafford Loans had variable interest rates (based on 91-day T-bill rate + 1.7% during school with an additional 0.6% increase upon graduation) capped at 8.25% or less, depending on yearly adjustments.) All lenders offer the same rate for the Stafford Loan, although some give discounts for on-time and electronic payment.
The College Cost Reduction and Access Act of 2007 reduced the interest rates on subsidized Stafford loans for undergraduate students starting July 1, 2008. These reductions are available only to undergraduate students, not graduate students, and only for subsidized Stafford loans, not unsubsidized Stafford loans. The interest rates are illustrated in the following table.
Phased-in Cuts in Interest Rates on Subsidized Stafford Loans for Undergraduate Students
| Year | Interest Rate Subsidized Stafford Loans (Undergraduate Students) | Interest Rate Other Stafford Loans (Graduate or Unsubsidized) |
|---|---|---|
| 2007-08 | 6.8% | 6.8% |
| 2008-09 | 6.0% | 6.8% |
| 2009-10 | 5.6% | 6.8% |
| 2010-11 | 4.5% | 6.8% |
| 2011-12 | 3.4% | 6.8% |
| 2012-13 | 6.8% | 6.8% |
Stafford Loans have loan fees of 4%, which are deducted from the disbursement check. These fees consist of a 3% origination fee and a 1% default fee (previously “guarantee fee”). Starting July 1, 2006, the default fee will be mandatory. (Previously, guarantee agencies could waive the fee and many did.) The origination fee will drop from 3% to 2% on July 1, 2006, and will drop by a further 0.5% each successive July 1, until it is phased out entirely on July 1, 2010.