What Is a Stafford Student Loan? How They Work

Stafford student loans are federal financial aid provided by the U.S. Department of Education to help students cover higher education costs. They assist with tuition, housing, books, and other related expenses.

Defining Stafford Loans

Stafford Loans are federal student loans offered through the William D. Ford Federal Direct Loan Program. While often still referred to as Stafford Loans, new loans are officially known as Direct Loans, as the original Stafford Loan program ended in 2010. These loans are distinct from private loans because they come directly from the U.S. Department of Education, not private banks.

These federal loans have a fixed interest rate, which remains constant for the life of the loan. Most Direct Loans do not require a credit check for the student borrower. They also offer various repayment options and include a grace period before repayment begins.

Subsidized vs. Unsubsidized Stafford Loans

The Direct Loan Program primarily offers two types of loans: Direct Subsidized Loans and Direct Unsubsidized Loans. The main distinction between them lies in how interest accrues and whether financial need is a factor.

Direct Subsidized Loans are specifically for undergraduate students who demonstrate financial need. The U.S. Department of Education pays the interest while the student is enrolled in school at least half-time, during the six-month grace period after leaving school, and during periods of deferment. This means the loan balance does not grow due to interest during these periods.

Direct Unsubsidized Loans are available to both undergraduate and graduate students, regardless of financial need. For these loans, the borrower is responsible for all accrued interest from the moment the loan is disbursed. Although payments are not required while in school or during the grace period, any unpaid interest will accumulate and be added to the principal balance of the loan, a process known as capitalization.

Eligibility Requirements

To qualify for Stafford Loans, students must meet federal student aid requirements. Applicants must be a U.S. citizen or an eligible non-citizen with a valid Social Security number. Enrollment must be at least half-time in an eligible degree or certificate program at an accredited institution.

Maintaining satisfactory academic progress is a requirement for eligibility. Students must not be in default on any other federal student loans. The Free Application for Federal Student Aid (FAFSA) is the application for all federal student aid, including Stafford Loans.

Applying for Stafford Loans

The application process for Stafford Loans begins with the submission of the Free Application for Federal Student Aid (FAFSA). This form collects financial information used to determine eligibility for federal student aid. After the FAFSA is processed, the student’s school financial aid office determines the specific loan amounts based on the cost of attendance and other aid received.

Students then receive a financial aid offer from their school, which includes any eligible Stafford Loans. To accept these loans, borrowers are required to complete two steps: signing a Master Promissory Note (MPN) and completing entrance counseling. The MPN is a legal document where the borrower promises to repay the loan, while entrance counseling educates borrowers about their rights and responsibilities. These steps must be finalized before loan funds can be disbursed.

Managing Your Stafford Loans

Once Stafford Loans are disbursed, borrowers manage their loan obligations before repayment begins. Interest accrues on unsubsidized loans immediately upon disbursement, while subsidized loans do not accrue interest while the student is in school or during grace periods. Repayment starts six months after a student graduates, withdraws, or drops below half-time enrollment.

Federal repayment plans are available, including the Standard, Graduated, Extended, and Income-Driven Repayment (IDR) plans. Borrowers can explore options like deferment and forbearance, which temporarily postpone loan payments under specific circumstances such as unemployment or economic hardship. While deferment may prevent interest from accruing on subsidized loans, interest continues to accrue on all loan types during forbearance periods, potentially increasing the total amount owed. Loan servicers manage the loans after disbursement, handling billing, payments, and providing information on repayment options.