Direct Stafford Loans, also known as Direct Subsidized or Direct Unsubsidized Loans, are student loans made available through the Department of Education to students attending a participating school. Students pursuing a degree at a four-year college or university, trade or career school, technical school, or community college may be eligible to receive student loans through the Direct Stafford program.
Direct Stafford loans offer a financing vehicle for both undergraduate and graduate students, but there are differences between the two categories of these loans.
Only undergraduate students are eligible to receive Direct Subsidized loans at this time. Direct Unsubsidized loans are available to both undergraduate and graduate students, regardless of financial need. All Direct Stafford loans, whether subsidized or unsubsidized, follow the same process for application, although loan amounts and costs vary.
The Application Process
Each student in need of borrowing to meet their educational goals should complete the Free Application for Federal Student Aid or FAFSA. The application collects information about the student’s financial means which is then used by the school’s financial aid department to determine what assistance is available. Direct Stafford loans can be used to supplement financial aid received from the school or other sources.
Direct Stafford loans are not based on the credit history of the borrower but the need to cover the full cost of attendance at a participating school. The availability of Direct Subsidized loans is dependent on the student’s ability to show financial need while Direct Unsubsidized loans are based on an unmet financial need after other financial aid is factored in.
Interest Rates and Loan Amounts
Direct Stafford loan availability to a particular student is up to the school where the student will attend, but loan limits are set by the Department of Education. Both annual and aggregate loan limits apply to Direct Subsidized and Direct Unsubsidized loans, depending on whether the student is claimed as a dependent or attending school as an independent student. The loan limits are as follows:
- First-year undergraduate: $5,500 for dependent and $9,500 for independent students, with no more than $3,500 in subsidized loans for either category.
- Second-year undergraduate: $6,500 for dependent and $10,500 for independent students, with no more than $4,500 in subsidized loans for either.
- Third-year and beyond undergraduate: $7,500 for dependent and $12,500 for independent students, with no more than $5,500 in subsidized loans for either.
- Graduate or professional students: $20,500 annual loan limit for unsubsidized loans only.
All Direct Stafford loans carry a fixed interest rate that does not fluctuate over time. The interest rate for Direct Subsidized and Direct Unsubsidized loans for undergraduate borrowers is currently set at 4.45 percent. Unsubsidized loans for graduate students currently have a fixed interest rate of 6 percent.
Interest accrues on both subsidized and unsubsidized student loans from the date the loan funds are received. However, the federal government pays for interest that accumulates on Direct Subsidized loans while a student is in school, meaning the total cost of borrowing is lower over the life of the loan. Direct Unsubsidized borrowers are responsible for any interest accrual on the loan while they are in school and during the six-month grace period.
Both Direct Subsidized and Unsubsidized Stafford loans have a funding fee of 1.066 percent which is often added to the total loan amount and repaid over time.
Options for Repayment
Because Direct Stafford Loans are made available through the Department of Education, borrowers have a variety of options for repayment once they graduate or otherwise leave at least half-time status as a student. Repayment may be on a standard ten-year schedule or a graduated term where payments are lower in the first few years and then increase over time. An extended graduated repayment program is also available for borrowers who want to spread out student loan payments over several more years.
All income-based repayment programs, including Pay-As-You-Earn, Revised Pay-As-You-Earn, Income-based, and income-contingent plans, are available to borrowers with Direct Stafford Loans. Consolidation of multiple Stafford Loans is also an option for borrowers before or during repayment.
Direct Stafford Loans are the most widely used federal student loan program for borrowers pursuing an undergraduate or graduate degree. However, there are stark differences between Direct Subsidized and Unsubsidized loans, including eligibility based on degree program and financial need, loan limits per year, and who pays for interest accrual on the loan during school. Borrowers should understand these differences before applying for these loans to help finance a college degree.