College Compass is happy to present the second installment of our “Paying for College” series: Stafford loans. Last time, we focused our discussion on Pell Grants, a highly sought-after kind of financial aid reserved only for those students who need and deserve it most. Today, our attention will be directed toward a more commonly available type of financial aid, the Stafford Loan. While this loan is also need based, it is generally available to middle class students and families who could still use some help paying for college. Because the process of applying and receiving financial aid can be confusing, we’ll follow the journey of a hypothetical student, Susie Q., as she goes from interested applicant to Stafford loan recipient.
Stafford Loans are similar to Pell Grants, and just about every other kind of federal student aid, in one very important initial aspect: the first step to applying for a Stafford Loan is completing and submitting a Free Application for Federal Student Aid (FAFSA). Students are required to update their FAFSA and apply for Stafford loans every year of college they want financial aid. This means you’ll take out one loan for your freshman year, one for your sophomore year, etc. until your financial situation improves or you graduate. Students who are claimed as dependents on their parents’ tax returns, like Miss Susie Q., have access to less money than their independent counterparts, because their parents are expected to help them pay for college.
Step 2: After submitting her FAFSA online and being accepted as a student, Susie Q. calls her Desired University’s (DU) financial aid office to see if they approve Stafford loans.
Step 3: If DU allows Stafford loans, Susie Q. talks with one of DU’s financial aid officers to determine how much of each kind of Stafford loan she might qualify for. (Susie Q. is a totally reasonable human being and knows that information might not be immediately available, so she ends up calling several times, until her information has been processed.)
Before exploring the differences between these two types of loans, there are a few general requirements any loan applicant considering Stafford Loans should be aware of. In order to qualify for a Stafford loan, the applicant must be enrolled or plan to enroll for at least half-time status (which varies from university to university, but is typically between 6-9 hours), must be accepted for enrollment or attending a university which participates in the Stafford Loan Program (information which should be readily available on the university’s financial aid website), and MOST IMPORTANTLY the applicant cannot be in default on any educational loan payments or owe a refund for any previous educational grants or loans.
Step 4: Susie Q. reads Campus Compass’ “Paying for College” blog serial, so she is already prepared and does not need to waste a lot of time learning about the differences between subsidized and unsubsidized Stafford loans.
One type of Stafford loan is subsidized by the federal government. This means the government is willing to cover all the interest accrued by this particular loan (remember, you have to apply for these types of loans every year and each loan is distinct from another) until six months after you graduate. Like the Pell Grant, access to this kind of loan is based largely on need; however, unlike a Pell Grant, it is far more accessible to middle class families. Another benefit to subsidized Stafford loans is the interest rate is fixed at 3.4%, which is half the rate of unsubsidized Stafford loans (though both rates are lower than any private loan). The interest rate is so low because the government essentially backs your loan. THIS DOES NOT MEAN THE GOVERNMENT WILL PAY YOUR STUDENT LOAN! Students are responsible for paying back both kinds of Stafford loans; the government will collect, one way or another (probably through garnished wages) if you default on your loans!
I’m not trying to scare you; there are a number of reasons to prefer federal education loans to private student loans: greater accessibility, no credit check, fixed interest rate, grace periods, variety and options, and the list goes on. However, misconceptions concerning student loans can be dangerous, so it’s important to understand what you’re getting yourself into. Loans are NOT the same thing as grants: even with federally subsidized loans, students are taking a risk when they accept loans because eventually they are going to have to pay them back. These risks are different, depending on the type of loan you receive, and we’ll talk about these differences (specifically the different risks associated with these two kinds of Stafford loans) as we continue our discussion.
The second kind of Stafford loan is unsubsidized. The recipient of an unsubsidized Stafford loan is immediately responsible for any interest accrued from the loan; interest accrues as soon as a student’s account is credited. You do have options when it comes to repaying an unsubsidized Stafford loan: you can either begin paying it off immediately, or defer payments until six months after graduation. This second choice is obviously very similar to the repayment plan of subsidized Stafford Loans. However, while deferring payment will allow you to push payment back to a time when you can actually afford to make payments, it won’t stop interest from being charged as soon as you are credited with the loan. Deferment can be viewed as a dangerous convenience because it is essentially a gamble; you are letting your debt increase significantly (at a 6.8% interest rate) over the course of at least four and a half years, and gambling that you will have a good enough job to make payments on that debt after you graduate. You could save yourself thousands of dollars over the long haul if you start making payments immediately; this quickly reduces your debt and lowers the total amount of money you are charged in interest. There is risk associated with this strategy too; once you agree to begin paying back a loan you cannot miss any payments without seriously jeopardizing your financial future. It may not be easy, but one the best ways to pay off an unsubsidized Stafford loan is to work your way through school and perhaps rely on your parent’s help making those first payments.
Step 5: After discussing the particular details of her loan with her bank’s loan officer, and more importantly with her parents, Susie Q. decides the best option for her is to apply for the maximum amount for both a subsidized and unsubsidized Stafford loan.
One interesting aspect of the Stafford loan program is that subsidized and unsubsidized loans are not mutually exclusive; you can apply for and receive aid from both at the same time. It’s important to keep track of how much money and of what kind of loans you are taking out, and to monitor your debt as it accumulates. This is very important because there is a debt ceiling (see Max Debt Allowed in chart below); once the debt ceiling is reached the government won’t let you borrow any more money through Stafford loans.
Though I have been warning you all about the dangers of ignoring or overlooking your loan interest rate, Stafford loans do have some of the best interest rates available. Aside from being lower than most any other loan you’ll ever get, the best part of Stafford loan interest rates is that they are fixed. A fixed interest rate means that the interest rate for the loan you take out will never change! This does not mean that every Stafford loan you take out will necessarily have the same interest rate; the interest rates vary year to year, but the interest rate on a specific loan will not change. This means that the interest rate for the loan you take out to cover your freshman year may be different than the interest rate you get on the loan for your sophomore year; however, the specific interest rate for your freshman year loan will never go up. A fixed interest rate is great because it lets you figure out exactly how much you will owe and when, months and even years in advance.
Step 6: Susie Q.’s student account is credited with the amount of money she applied for, which is the maximum amount available to her.
I imagine the biggest question on everyone’s mind concerning Stafford Loans is, “How much aid can I actually get?” The answer depends on your tax status (whether your parents claim you as a dependent), your grade (freshman – senior), as well as your status as a student (full-time student or part-time). It is important to point out the amount of money available through Stafford loans can change over time. Remember, these are federal education loans and so they are subject to the president’s policy and Congressional budgets.
Additionally, students may not receive all the money they apply for. This can happen for several reasons: the bank or lender may charge what is called an origination fee, which is simply a fee for processing the loan; this is a small fee that is usually no more than 1%. There is another, similar kind of fee called a default fee, where the lender charges a small fee to set up a reserve in case the student defaults on his or her debt. Also, it’s important to remember the amount of aid you are eligible for depends on the deliberations of your university; just because you want the maximum amount does not mean you will be able to even apply for it!
Step 7: Though Susie Q. received the maximum amount of Stafford loans available to her, she still does not have enough money to pay for DU. She’s not worried though; she plans on reading the next edition of College Compass’ “Paying for College” series, which will cover even more options on how to pay for school!
This may seem like a lot of information, and it is, but there are many considerations to take into account when paying for college. I encourage you to carefully research your options, contact banks and universities, and really work to understand the different financial strategies available to you. Another great option is to follow our “Paying for College” series on College Compass; next time we’ll be covering Direct PLUS loans, a loan that allows parents to pay for their children’s entire tuition! Until then, keep studying!