Students researching their financial aid options often find themselves confused by the different types of loan programs. Find out more about the Federal Stafford Loan program and whether it might be the financial aid solution you've been looking for.
Federal Stafford Loans Explained
A number of federal education loan programs are available to finance your educational expenses, but understanding the differences can be confusing. The Federal Stafford Loan is the first loan you should apply for when seeking financial aid for your education.
The Stafford Loan Program
What is a Stafford Loan and how does it work? Will I qualify? What is the difference between a subsidized and unsubsidized Stafford Loan? These are the questions most students have when they research financial aid options. The Federal Stafford Loan program is an excellent source of financial aid for many students.
In 1965, the Higher Education Act authorized the Guaranteed Student Loan (GSL) programs. The International Education Act followed in 1966, which allowed students to obtain a GSL in order to attend foreign institutions of higher education. Since then there have been a number of amendments and changes, which have further shaped the Stafford Loan program into what it is today. To be eligible for the loan you must be a U.S. citizen or national, U.S. permanent resident, or an eligible non-citizen enrolled at least half time in an eligible program.
Stafford Loan Details
The federal government guarantees the Stafford Loan program. Schools generally participate in one of two Stafford Loan programs--the William D. Ford Direct Loan program or the Federal Family Education Loans (FFEL) program. In the Direct Loan program, the federal government is the lender, while banks, credit unions, or other financial institutions are lenders for the FFEL program.
Stafford Loans are either subsidized or unsubsidized. Repayment on the loan principal does not begin until after you graduate, leave school, or drop below half-time enrollment. The government pays the interest on a subsidized loan while you are in school and during a 6-month grace period before you are required to begin repayment of your Stafford Loans. You must pay the interest on an unsubsidized loan while you are in school and during the grace period. You can choose to defer payment of the interest but it is added to the principal and increases the amount of your loans.
Eligibility for the Stafford Loan is not based on your credit score. Student with financial need are eligible for a subsidized loan and most students are eligible for an unsubsidized loan. You must be enrolled at least half time and making satisfactory progress in an eligible degree, certificate, or credential program.
How Much You Can Borrow With a Federal Stafford Loan
The amount of money you can borrow with a Federal Stafford Loan depends on whether you are a dependent or independent student as defined by criteria on the Free Application for Federal Student Aid (FAFSA).
The Federal Stafford Loan is one of the most affordable loan programs available to finance your education. There is no collateral required, no credit check, and Stafford Loans are eligible for federal loan consolidation. If you have an unsubsidized loan, your interest payments are usually tax deductible and there are no penalties for paying off the loan early. The Stafford Loan program has a low fixed-rate of 6.8% for the 2006-2007 school year. A fee of up to 4% of the loan is charged and is deducted proportionately from each installment.
Receiving Your Stafford Loan
To receive a Stafford Loan, you must fill out the FAFSA with financial information about you and your family, if you are a dependent student. When your school receives the FAFSA information, they will contact you regarding your loan eligibility. If your school participates in the Direct Loan program, you are required to sign a loan promissory note--a binding legal document describing the loan and the repayment terms. If your school participates in the FFEL program, you need to take your Stafford Loan application to a lending institution.
Once the loan has been processed and approved, you receive your funds directly from your school, generally in two installments. No single installment can exceed one-half of the total loan amount for the year. Funds are applied first to tuition and school fees, then to room and board or any other school charges. If there are funds remaining, you can elect to receive the remainder in cash or check from the school, or you can have the school retain the funds for application to future educational charges. If you are a first-year student and a first-time borrower, the school generally waits until 30 days after your enrollment has begun before dispersing your funds. This helps ensure that you don't have to repay the loan if you withdraw from your classes within the first 30 days.
When a Stafford Loan Doesn't Cover the Full Cost of Your Education
Sometimes a Federal Stafford Loan does not cover the full cost of your educational expenses. You have several options. First, you can look online or in your local library or bookstore for scholarships for which you might qualify. Scholarships can be based on financial need, academic achievement, or any of a number of other factors. Second, you can apply for additional student loans such as:
• Alternative loans - privately funded loan programs for which you might qualify
• The PLUS Loan (Parent Loan for Undergraduate Students) - a loan your parents can take
out on your behalf
Final Points to Remember About Applying for Stafford Loans
• Complete the FAFSA (online or on paper)
• Sign the loan promissory note
• Keep a copy of the promissory note and the FAFSA for your records
• Fill out a renewal FAFSA each year and apply for a new Stafford Loan each school year
Sources:
Department of Education 2006-07 Guide to Federal Student Aid
StudentAid.Ed.Gov
StaffordLoan.com