Stafford Loans, in Plain English | 02.22.10

Now that it’s FAFSA time, I thought that the second installment of this blog should focus on a piece of federal aid that many students receive as part of their award: the federal Stafford loan. Read on to find answers to questions like: “What is it?”, “What does it do for me?”, and “What is it going to cost me?”

What is a federal Stafford loan? The Stafford loan is a type of financial aid granted from the United States government to students who file a Free Application for Federal Student Aid (FAFSA) and show demonstrated financial need. The Stafford Loan program is an evolution of the Guaranteed Student Loan Program, established in 1965, and was named after a Republican senator from Vermont who was highly honored and respected for his work on higher education reform.

The benefits of a Stafford loan. First of all, a Stafford loan is one of the best types of student loans you can get because they have fixed, relatively low interest rates — often much lower than that of the private student loan industry. Due to the fixed interest (meaning it doesn’t change over the life of the loan), there is no chance of the annual percentage rate (APR) suddenly spiking due to the economy; this should be taken a great measure of financial safety, as many students, mortgage holders, and other loan recipients have had to deal with some crazy interest fluctuations in the past two years as a result of the economic recession. The bottom line though is that the interest that is calculated on this loan will increase at the same rate through your entire repayment period — no sudden jumps of huge amounts of interest to pay off, unless you miss payments or go into default on the loan.

What does a Stafford loan end up costing? To answer this question accurately, you first need to know that Stafford loans come in two flavors: unsubsidized and subsidized. Here is a super quick reference chart for the differences between the two:

Unsubsidized Stafford Loan
• Usually higher interest than subsidized, new loans currently at 6.8% fixed for 2010-2011
• Interest accrues while you are in school, and after you graduate

Subsidized Stafford Loan
• Usually lower interest than unsubsidized, new loans currently at 4.5% fixed for 2010-2011
• Interest does not accrue while you are in school, or during your 6 month grace period after graduation — interest only starts to build once your loan goes into “repayment” status

To sum this information up, you pay less overall with a subsidized Stafford loan than an unsubsidized one over the life of the loan. One other nice thing about this type of federal loan is the fact that it has a generous repayment period and lots of different repayment options that will NOT overwhelm you once you graduate. The same usually cannot be said for a private student loan, which 99% of the time has a much higher interest rate (often variable) and whose lenders generally are much less flexible about repayment options.

ScholarshipPoints Code: STAFFORD2010

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