College Finance: All About Stafford Loans

The Stafford loan is the primary loan offered by the federal government. There are two types of Stafford loans: Subsidized and unsubsidized.

Subsidized Stafford Loans

The need-based subsidized Stafford loan is the best option for a college student. If a student qualifies for this loan, the government will cover the interest payments on the loan as long as he or she is enrolled full time in college. As soon as the student graduates or stops attending full time, he or she has a six month grace period until the government stops covering the interest. Getting a subsidized student loan typically looks something like this:

1. The student applies and qualifies for a subsidized loan totaling, for example, $1,350 per semester.

2. A qualified bank writes the check to the student and mails it to the school. The school then distributes the funds.

3. The government begins paying the bank interest on the student's behalf.

4. One year later the student graduates.

4. Six months later a bill with the loan balance principal and an annual interest cost arrives in the mailbox.

Subsidized Stafford loans are granted to students based on need. The need is determined by the parents' income if the student is considered a dependent or by the students' income if they are considered independent.

Unsubsidized Stafford

An unsubsidized Stafford loan works just like the other version, except the student is responsible for all accumulated interest. This version is similar to an auto loan. The principal is broken down into a payment schedule and each month a bit of interest and a bit of principal is owed to the lender. The one difference from a regular bank loan is the student can defer payment until after graduating or dropping to a part-time schedule. But if you choose to take this route, interest will accrue during your college years and you get hit with a larger bill after graduation.

Starting this summer, most of the rules surrounding Stafford loans are set to change. The current variable interest rate charged on the loans is scheduled to move to a fixed rate of 6.8 percent. Beginning July 1st 2007, the amount freshmen and sophomore's can borrow will change. Freshmen should be eligible to borrow $3,500 while sophomores will be allowed to borrow $4,500. The total amount an undergrad can borrow on this loan is $23,000.

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