What’s a Direct Stafford Loan?

What you need to know about this federal student loan, from how to be eligible to applying to repayments.

Written by Kristen Kuchar / February 3, 2022
Reviewed by Mark Kantrowitz

Quick Bites

  • Stafford Loans are also known as Direct Loans.
  • They’re federal loans provided by the U.S. government to help students pay the costs of college.
  • There are two types of Stafford loans—subsidized and unsubsidized. With subsidized loans, you don’t pay interest while you’re in school or during periods of authorized deferment.
  • Stafford Loans are available to all eligible students—undergraduate, graduate and professional (only undergrads can qualify for the subsidized version, though).

A Stafford Loan, also called a Direct Loan, is a federal student loan from the U.S. Department of Education that you can apply for in order to help pay for college. As with any loan, you’re required to pay it back plus the interest.[1]

Federal student loans are available to eligible students for education at a four-year college or university, community college, or trade, career or technical school.[2]

Of course, it’s best to avoid borrowing through student loans, if possible. But federal loans are often preferable to private loans because they come with some perks.

Here’s what you need to know about Stafford Loans.

Inside this article

  1. Subsidized vs. unsubsidized
  2. How much can you borrow?
  3. Pros and cons
  4. How to apply

Subsidized vs. unsubsidized Stafford Loans

There are two types of Stafford Loans: subsidized and unsubsidized.

Subsidized loans are only available to undergraduate students. Unsubsidized loans are available to undergraduate, graduate and professional school students.

With subsidized student loans, the government pays the interest during certain periods. These include while you’re in school at least half-time, for the first six months after you leave school (also called your grace period) and if you ever qualify for an approved deferment.[2]

If the interest on an unsubsidized loan is not paid during a deferment or forbearance period, the unpaid interest will be capitalized, or added to the principal balance, at the end of the deferment or forbearance period.

Tip: A deferment is when you temporarily don’t need to make a student loan payment. This can be due to a job loss, financial hardship or other approved situation.

In order to qualify for subsidized student loans, you’ll need to demonstrate financial need. That is not the case with unsubsidized loans. These loans are available to eligible graduate and professional students in addition to undergraduate students, and eligibility isn’t based on financial need.[1]

You’re required to pay the interest for the life of the loan, even during payment pauses.[2] However, there are exceptions, such as if you have a deferment due to active cancer treatment. Also, the current payment pause and interest waiver during the pandemic temporarily sets the interest rate to zero on both subsidized and unsubsidized loans.

How much can you borrow?

For undergraduate students, the maximum you can borrow each year ranges from $5,500 to $12,500 per year for both subsidized and unsubsidized loans. The amount you can borrow depends on your dependency status and what year you are in school.[1] Dependent undergraduate students can borrow $5,500 to $7,500 per year and independent students can borrow $9,500 to $12,500 a year.

For graduate and professional borrowers, you can borrow up to $20,500 each year of Direct Unsubsidized Loans.[1]

“Only borrow what you need, and keep track of how much you’ve borrowed to date,” says Jill Desjean, senior policy analyst at the National Association of Student Financial Aid Administrators (NASFAA).

In addition to Stafford subsidized and unsubsidized loans, there are Direct PLUS Loans. These are for graduate or professional students as well as parents of dependent undergraduate students. Unlike Stafford or Direct Loans, Direct PLUS Loans require a credit check. But it’s not to see if you have a high credit score.

The credit check is used to check whether the borrower has an “adverse credit history,” which is a serious delinquency on more than $2,085 in debt in the past two years or certain derogatory events (bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or default determination) within the past five years. Eligibility for a PLUS Loan does not depend on the borrower’s credit scores, income, debt-to-income ratios or the duration of employment with the current employer, unlike private student loans.

These loans are unsubsidized, and you can borrow the remainder of college costs (as determined by the college) that are not covered by financial aid.[1]

The maximum loan length for Stafford Loans is 10 to 30 years, but your repayment length depends on the repayment plan you choose and the amount you borrow.[3]

Tip: You’ll want to avoid taking out student loans, if you can. So before you borrow anything, consider choosing an affordable college, applying for scholarships and taking advantage of an employer tuition reimbursement, if available.

Pros and cons of Direct Stafford Loans

There are benefits and drawbacks to federal student loans over private student loans. For starters, if you demonstrate financial need, you may qualify for subsidized loans, and have the interest paid during deferments.

“Direct subsidized and unsubsidized loans come with borrower protections not often found with other types of loans,” says Desjean.

Pros

Some benefits of Stafford Loans that Desjean points out include:

  • No credit checks

  • No payments during school

  • Opportunities for income-driven repayment plans

  • Deferments and forbearances

  • Time-based and service-based forgiveness

  • Discharge for death and total and permanent disability

Federal student loans offer a fixed interest rate that’s set annually on July 1. A fixed interest rate, as opposed to a variable interest rate, means it will stay the same until you pay it off—no surprises or sudden increases. Rates change yearly but won’t be higher than 8.25% for undergraduates.[3] For the Stafford Loan for graduate and professional school students, the cap is 9.5%, and for the PLUS Loans it’s 10.5%.

These are the interest rates for federal student loans disbursed between July 1, 2021, and July 1, 2022[4]:

  • Direct Subsidized Loans for Undergraduates – 3.73%

  • Direct Unsubsidized Loans for Undergraduates – 3.73%

  • Direct Unsubsidized Loans for Graduates – 5.28%

  • Direct PLUS Loans – 6.28%

You also don’t need a co-signer, and you don’t have to begin repaying the loans until six months after you leave college or drop below half-time.[1]

Cons

As with any student loans, there are drawbacks. All student loans accrue interest, so you’ll be paying back a greater amount than you borrowed. While federal student loans offer deferments, there are time limits to these and they need to be approved.

There are also limitations on who is eligible for repayment plans. If you don’t make your payments, this can not only damage your credit rating, but also lead to garnishing your wages and the withholding of any tax refunds you might have received.[5] Plus, dealing with too much student loan debt can make it more challenging to reach other financial goals down the line, such as saving for retirement.

Limitations are one drawback of federal loans specifically, says Desjean. “Direct subsidized and unsubsidized loans have annual and aggregate limits, so students may not be able to borrow as much as they need to cover the gap between college costs and financial aid,” she says.

“Some students with very good credit and/or a co-signer might be able to get a better interest rate in the private market than from federal loans, and private loans may offer refinancing options that aren’t available with Direct Loans,” she adds.

Desjean also points out that Direct Loans generally cannot be discharged in bankruptcy either.

How to apply

The first step in applying for any federal student aid, including Stafford Loans, is filling out the Free Application for Federal Student Aid, better known as the FAFSA.

Based on the information you provide on your application, you’ll receive a financial aid offer letter, which may include federal student loans. You can accept or deny this loan.

If you accept the loan, you’ll need to complete something called entrance counseling, which explains details of borrowing and repaying the loan, as well as sign your Master Promissory Note, which is the legal agreement to all of the terms of the loan.[1]

Even if you don’t want to borrow with student loans, it’s always a great idea to complete the FAFSA as soon as you can. The FAFSA can be your ticket to free money in the form of grants and scholarships and the opportunity to participate in your school’s work-study program.

Article Sources
  1. “Loans,” Federal Student Aid, https://studentaid.gov/understand-aid/types/loans.
  2. “Subsidized and Unsubsidized Loans,” Federal Student Aid, https://studentaid.gov/understand-aid/types/loans/subsidized-unsubsidized.
  3. “Stafford Loans for Students,” GovLoans, https://www.govloans.gov/loans/stafford-loans-for-students.
  4. “Federal Interest Rates and Fees,” Federal Student Aid, https://studentaid.gov/understand-aid/types/loans/interest-rates.
  5. “What happens if I don’t pay back my student loan?” Federal Student Aid, https://studentaid.gov/help-center/answers/article/what-happens-if-i-do-not-pay-back-student-loan.

About the Authors

Kristen Kuchar

Kristen Kuchar

Kristen Kuchar is a journalist, covering money, travel and the beverage industry. Kristen has previously contributed personal finance and business content to Money.com, Money Under 30, The Simple Dollar, Saving for College, Credible, The Brad’s Deals Blog, Outdoor Business Magazine and more.

Full bio
Mark Kantrowitz

Mark Kantrowitz

Mark Kantrowitz is a nationally-recognized expert on student financial aid, the FAFSA, scholarships, 529 plans and student loans. His mission is to deliver practical information, advice and tools to students and their families so they can make smarter, more informed decisions.

Full bio

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