Description: Federally insured loans available directly from some colleges, banks, other lenders, or state agencies.
Availability: Families must complete the FAFSA to apply.
Eligibility: Students who demonstrate financial need may be offered a
subsidized loan; students who do not meet the criteria for financial aid may
be offered an unsubsidized loan.
Loan amounts: In 2005, annual maximums were:
• $2,625 freshmen
• $3,500 sophomores
• $5,500 juniors and seniors
Students who are not dependent on a parent or guardian, or students
who have been denied a Federal PLUS Loan, may be eligible for additional
amounts of as much as $4,000 for freshmen and sophomores and as much as
$5,000 for junior and seniors.
Disbursement: Direct Stafford Loans come from the U.S. Department
of Education and are delivered to the student through the college; repayment
is made to the federal government.
Federal Family Education Loan (FFEL) Stafford Loans come from banks
or other lending institutions; repayment is made to the lender or to a servicing
agent it appoints.
Tax issues: Interest may be tax-deductible based on income level.
Interest formula: Variable interest rate based on the most recent sale
of ninety-one-day Treasury Bills held prior to June 1 of each year, plus a
margin. Rates become effective on July 1 of each year. In 2006, the margin
above the index was 1.7 percent while the student is enrolled, in a grace
period, or in a deferment period; the margin above the index was 2.3 percent
while the loan was being repaid. The variable interest rate was guaranteed
not to exceed 8.25 percent.
In 2006 actual interest rates were 4.7 percent for students still in school or
still in a grace period, and 5.3 percent for students in the repayment period.
Fees: The guarantee and origination fees cannot exceed 4 percent, and
some lenders will offer lower fees. Fees are deducted from loan proceeds at
the time of disbursement. In other words, if you are borrowing $10,000 and
the fees are 4 percent you (or rather, the college) will receive $9,600, but you
will start out owing the full amount.
Repayment: Differs for the two types of Stafford loans.
• Subsidized Stafford Loans. Repayment of the principal is
deferred and interest is subsidized by the government for as
long as the student is enrolled at least half-time in school and
during deferment periods.
• Unsubsidized Stafford Loans. Repayment of the principal
is deferred and interest payments can be deferred as long as
the student is enrolled at least half-time and during deferment
periods. Any unpaid interest is added to the principal and is the
responsibility of the borrower once repayment begins.
For all Stafford loans, repayment is scheduled to begin six months after
the student graduates, withdraws from college, or drops below a minimum
of half-time status. The repayment period extends for ten years. There is no
prepayment penalty.
Under certain circumstances, including unemployment and illness, a
borrower may request a temporary deferral (or forbearance) of principal and
interest payments, although interest continues to accrue.
Special programs: Some state programs (such as MEFA in Massachusetts)
offer discounts for state residents. In the MEFA program, students receive a
.5 percent reduction during repayment of the loan, an additional .5 percent
reduction if payments are made as automatic withdrawals from a checking or
savings account, and a 2 percent additional interest rate reduction after fortyeight
consecutive on-time payments have been made.
How to apply: Students are automatically eligible for Stafford Loans if they
file a FAFSA. Contact the college’s office of financial aid and your state’s educational
financing agency for additional information about special programs.
Service-Cancelable Stafford Loans
One way to reduce the cost of college—at least the portion of expense
that is paid by a Federal Stafford Loan—is to enroll in a degree program
that is considered a “critical field of study” and then take a job in that field.
A number of states offer a Service-Cancelable Stafford Loan to encourage
trained professionals to meet regional needs.
The loan may be a need-based subsidized loan or an unsubsidized loan
made available to any applicant. For the service-cancelable program, though,
states add residency requirements, a minimum grade point average, and a
commitment to one of the listed fields of study.
Check with your state’s higher education funding authority or the
financial aid office of your school for details.
In many states, the greatest need is for people in the health field.
Acceptable programs of study include those for dental hygienists, laboratory
technicians, nurses in almost any specialty or degree level, occupational or
physical therapists, and physician assistants. Graduate health fields include
dentistry, optometry, pharmacy, and veterinary medicine.
As an example of this sort of program, the Georgia Student Finance
Authority requires participants to be a legal resident of the state under its
definition of that status, be accepted for admission or enrolled at least halftime
in an approved school, maintain at least a “C” average in most programs,
and not be in default on any Federal education loan or owe a refund on any
Federal Pell Grant, Federal Supplemental Educational Opportunity Grant
(FSEOG) or Student Incentive Grant (SIG).
After graduation, students can repay their loan by working in their
field of study in the state where the program is based. In the Georgia plan,
the trade is one-for-one: for each calendar year of full-time qualifying service,
the state will cancel one academic year of assistance in most programs. (If the
original Service-Cancelable Stafford Loan was unsubsidized, the student or
the parents are still responsible for all accrued interest.)
Read More: FEDERAL STAFFORD LOAN (SUBSIDIZED OR UNSUBSIDIZED)
