Stafford Loan
The primary federal loan for students is called the Stafford Loan and comes in two variations:
A.) Federal Family Education Loan Program (FFELP) loans are distributed by private lenders, such as credit unions, banks and savings & loan associations. An example of a private lender offering FFELP loans is Citibank Student Loans. These loans are guaranteed against default by the federal government.
B.) Federal Direct Student Loan Program (FDSLP) loans, administered by 'Direct Lending Schools', are distributed by the US government directly to students and their parents.
All Stafford Loans are either subsidized (the government pays the interest while you're in school) or unsubsidized (you pay all the interest, however you can have the payments deferred until after graduation). To receive a subsidized Stafford Loan, you must be able to prove financial need. You can defer the payments until after graduation by capitalizing the interest with the unsubsidized Stafford Loan. This adds the interest payments to the loan balance, increasing the size and cost of the loan. All students, regardless of financial need, are eligible for the unsubsidized Stafford Loan.
Beginning on July 1, 2007, Stafford Loans will allow dependent undergraduates to borrow up to $3,500 their freshman year (up from $2,625), $4,500 their sophomore year (up from $3,500) and $5,500 for each remaining year (independent students and students whose parents have been turned down for a PLUS loan can borrow an additional unsubsidized $4,000 the first two years and $5,000 the remaining years). Graduate students can borrow $20,500 per year (up from $18,500), although only $8,500 of that is subsidized. There are also cumulative limits of $23,000 for an undergraduate education and a $65,500 combined limit for undergraduate and graduate. (For independent students and for students whose parents were denied a PLUS loan the cumulative limits are $46,000 and $138,500. Some medical school students may be eligible to borrow up to $40,500 a year (up from $38,500) totaling $189,125.)
Many students have been combining subsidized loans with unsubsidized loans to borrow the maximum amount allowed each year.
Stafford Loans have a fixed interest rate of 6.8% for loans with a first disbursement after July 1, 2006. (Previously, Stafford Loans had variable interest rates (based on 91-day T-bill rate + 1.7% during school with an additional 0.6% increase upon graduation) capped at 8.25% or less, depending on yearly adjustments.) All lenders offer the same rate for the Stafford Loan, although some may give discounts for proper payment.
Stafford Loans have loan fees of 4%, which are deducted from the disbursement check. These fees consist of a 3% origination fee and a 1% guarantee fee. The guarantee fee was mandatory beginning on July 1, 2006. The origination fee also dropped from 3% to 2% on July 1, 2006, and will drop by a further 0.5% each succeeding July 1, until it is moved out entirely on July 1, 2010. Repayment begins six months after the student graduates or drops below half-time enrollment. The average repayment term is 10 years; however one can get access to alternate repayment terms by consolidating the loans.
