When you are applying to different colleges, the cost to attend each school is likely near the top of your list of concerns. To help you deal with the cost of your education, you may be eligible for a Direct Stafford Loan. This type of loan can cover tuition, textbooks, room and board, and other education-related expenses. Here’s what you need to know about Direct Stafford Loans to make an informed decision about using them to fund your higher education.
Types of Direct Stafford Loans
Direct Stafford Loans, often simply called Stafford Loans, are student loans funded by the federal government. Students can apply them to education expenses at four-year colleges and universities, as well as community colleges, trade schools, career schools and technical schools. These loans fall into two primary categories.
Direct Subsidized Loans
With a Direct Subsidized Loan, the U.S. Department of Education will pay the interest on your loan for as long as you are in school at least half-time. This way, your total loan amount will not increase while you are working toward your degree, which can alleviate some of the financial burden when it comes time to repay your loans.
The federal government will also pay your interest while your loan is in the six-month grace period after you leave school, regardless of whether or not you graduated. If you are eligible for a deferment of your loan, which is a postponement of payments for financial hardship, the government will continue to pay your interest during this period as well.
Subsidized Stafford Loans are based on financial need, so you will need to demonstrate that you or your parents are unable to cover the costs of your education on your own. The amount you will be eligible to borrow cannot exceed the extent of your financial need. In addition, your school can set limits on the amount you are able to borrow based on the cost of tuition and other education-related expenses. Subsidized Loans are only available for undergraduate school.
Direct Unsubsidized Loans
For Direct Unsubsidized Loans, you will be responsible for paying any interest that accrues on your loan from the moment the loan is issued. While you are not required to make any payments while you are in school, you will still have to pay the interest later on as it will be added to your principal balance. The same goes for any interest accrued during the grace period and any time your loan is deferred. Of course, you can opt to make interest-only payments during these times to prevent your loan amount from increasing over the years you aren’t paying down the principal.
There are no need-based requirements for Unsubsidized Stafford Loans, so any undergraduate or graduate student can be eligible. Your school will set the limit on the amount you can claim, basing it on the overall cost to attend the school as well as any other financial aid you receive.
Qualifying for Direct Stafford Loans
To qualify for a Direct Stafford Loan, you must be enrolled in a school that participates in the program on at least a half-time schedule. In addition, you must be in a program that will result in a degree or certificate upon graduation. If you are simply taking classes for personal enrichment, you will not be eligible. In order to apply for a Direct Stafford Loan, you or your parents must first fill out the Free Application for Federal Student Aid, called the FAFSA for short.
If your parents claim you as a dependent on their tax returns, they will be the ones to complete the application as it is their finances that will determine your level of financial need. If, on the other hand, you are an independent student, like if you are returning to school as an adult or your parents elect not to claim you on their tax return, you will complete the application using your own financial information. For the FAFSA’s purposes, all graduate students are considered to be independent, regardless of age or tax status.
Once you have completed the FAFSA application, your school will review the information to determine the amount of aid you are eligible to receive. The school will then set the amounts for your Subsidized and Unsubsidized Loans and combine them with any scholarships you have received. The total amount constitutes your full financial aid package.
Direct Stafford Loan Terms
As of July 1, 2018, the current interest rate on Direct Stafford Loans for undergraduate students is 5.05 percent. For graduate students, the rate goes up to 6.6 percent. These rates are fixed, meaning that they will not change over the life of your loan. However, rates do change from year to year, so if you take out additional loans in subsequent years, you may pay a higher or lower interest rate. Military members may be eligible for interest rate deductions, so be sure to include this information on your FAFSA application if it applies to you.
There are limits to the number of times you can collect Direct Stafford Loans over the years, depending on the length of your degree program. As of July 1, 2013, the maximum eligibility period is 1.5 times the length of your study program. For a four-year degree, this equates to six years. For a two-year program, you will be eligible for three years of Stafford Loans. This is to account for the fact that many students do not complete their degrees within the program length specified by the school, whether due to difficulty getting into required classes or attending school less than full-time.
It is important to note that the timeline does not start over if you switch to a new degree program. For example, if you change from one four-year program to another of the same length, you will still only be able to claim Direct Stafford Loans for six years in total, regardless of how long it takes you to complete your new degree. If you make the switch from a four-year degree to a two-year program, your new term limit will become three years. If you had already claimed financial aid for three years while working on the first program, you will no longer be able to collect financial aid to finish your new program.
There is a small disbursement fee each time you take out a Direct Stafford Loan. As of October 1, 2018, this amount constitutes 1.062 percent of the amount of your loan. This amount will be deducted from the final dollar amount you receive each semester or trimester. The fee amount is subject to change each year so it may be slightly higher or lower after October 1, 2019.
Direct Stafford Loan Size Limits
There are also limits on how much you can claim in a single year and on the total dollar amount of your loans over the course of your education. For your first year of undergraduate school for dependent students, you can claim up to $5,500, of which up to $3,500 can be subsidized. In the second and third years, both of those amounts increase by $1,000 each year. You’ll stay at the third-year amount for any additional years. In total, you can borrow up to $31,000, with no more than $23,000 coming from Subsidized Stafford Loans.
Independent students can claim a bit more than their dependent counterparts, collecting up to $9,500 in the first year. However, the cap on Subsidized Stafford Loans stays at $3,500. As with dependent students, these amounts increase by $1,000 each for the second and third years, then stay at that level in subsequent years. The total amount independent undergraduates can borrow is $57,500, again with no more than $23,000 subsidized.
As mentioned previously, all graduate students are considered independent, even if their parents still claim them as dependents. Subsidized Stafford Loans are not available for graduate school, but students can still claim up to $20,500 per year in Unsubsidized Stafford Loans, up to a total maximum of $138,500. The only exception is for students enrolled in health care programs at the graduate and professional level. They may be able to claim additional Direct Unsubsidized Loans, depending on the policies at their particular schools.
In all of these categories, you will no longer be able to claim additional Direct Stafford Loans once you have reached your total limit, regardless of how much time you have left to complete your degree program. However, you do have the option to pay down your loans before graduating to free up additional room if you have not yet exceeded the maximum eligibility period for your degree program.
Collecting Your Direct Stafford Loans
Once your FAFSA application has been approved and your school has sent you your loan eligibility details, you can accept your Direct Stafford Loans. The first time you collect a loan, you’ll need to complete entrance counseling to verify that you understand your future repayment requirements. You’ll sign a Master Promissory Note to agree to the loan terms. After the first time you collect Direct Stafford Loans, you won’t need to go through this process again.
After completing the entrance counseling and Master Promissory Note, your school will fill you in on the details of how to collect your funding. This can vary from school to school, so get in touch with your financial aid office if you have any questions about the specifics. Typically, the school will deduct your tuition, fees and any room and board charges from the total amount of your loan. Any funds that are left over will go directly to you. You can then put that money toward textbooks and other school-related expenses.
For each term that you collect Direct Stafford Loans, you’ll need to let your school know how much you wish to claim. For example, you may prefer to stick with only Direct Subsidized Loans and not claim any Direct Unsubsidized Loans. You might also only wish to claim a small portion of the total amount for which you are eligible to minimize your debt obligations.
After your loan has been disbursed, you may be able to cancel a portion of it if you realize you don’t need the full amount. However, not all schools allow this, and if they do, there is typically a limited window in which it is possible. Check with your school’s financial aid office for specific details.
Repaying Direct Stafford Loans
Once you have collected your first Direct Stafford Loan, your loan servicer will reach out to you to update you on the status of your account. You’ll be able to set up an online account to monitor your loans over the years, and you can make your payments here as well when the time comes. You can also make payments by check or over the phone if you prefer.
Upon leaving school, you’ll have a six-month grace period to get started in your career before you have to start making payments. As that grace period is coming to a close, your loan servicer will provide you with additional details regarding the repayment process. In general, you’ll have 10 to 25 years to pay back your Direct Stafford Loans, depending on the specific repayment structure you choose. Obviously, the faster you can pay your loans off, the less interest you will pay on them.
If you are having difficulty making your payments each month, reach out to your loan servicer. You may be eligible to switch to a different repayment structure, like one that is income-based. In some cases, you may be able to defer your loans until you are on more solid financial footing. Your loan servicer can assist you in this area.
Additional Help with Your Student Loans
The student loan process can be complex, especially if you have other loans besides Direct Stafford Loans. The team here at Iron Fist Legal may be able to help you get your payments down. We look for any discrepancies in your loan terms so that we can negotiate a reduced principal, often saving students up to 70 percent. Reach out to us today to learn more.