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Subsidized Stafford Loans

federal stafford loans

Subsidized Stafford Loans - They're in Your Interest

Subsidized Stafford Loans are federal Stafford Loans that are offered to undergraduate and graduate students who demonstrate a financial need. In order to qualify, a student's Expected Family Contributions (EFCs) as determined by the government's FAFSA (Free Application for Federal Student Aid) must be low.

When the government subsidizes a federal Stafford Loan, they agree to pay for the interest that accrues on the loan during the time you are in school and throughout the course of your grace period, or the breather they give you after you graduate and before you start making loan payments. The government will also pay your interest during times when you've been authorized to defer the loan. It's easy to keep the subsidized status if you remain enrolled in an approved program at least half time and there are no major changes to your family's EFC.

Unsubsidized undergraduate school loans are not awarded to students based on need. Consequently these loans require borrowers to pay any interest that accumulates on their loans while in school, during periods of deferment and during grace periods. Interest on subsidized federal student loans, on the other hand, is paid by the U.S. government during those same time periods. For both types of federal loans, borrowers are allowed to defer any payments until after they graduate. This assumes that students remain in approved programs on a half time or full time basis.

  • Borrow the entire cost of undergraduate education
  • Defer Payment until after Graduation
  • Co-signer release upon qualification
  • Up to 0.25% interest rate reduction.

How much interest are we really talking? Well if you're a dependant student and you borrow the maximum amount allowed for Stafford Loans, the interest can add up to a substantial sum over four years. For dependant students the maximum allowable debt from all Stafford Loans, both subsidized and unsubsidized, upon graduation is $23,000 (as of the 2012-2013 school year). Annual limits are as follows:

  • $3,500 in the first year
  • $4,500 in the second year
  • $5,500 in the third year
  • $5,500 in the fourth year

So if you were to take out the maximum subsidized Stafford Loan amount for four years at a rate of 3.4%, the government would pay over $3,000 in interest on your behalf. That's because they would pay interest for over fours years on the first loan, (four school years plus a six month grace period), for over three years on the second loan, for over two years on the third loan and for over a year on the fourth. Yep three grand that you'll never have to pay! So when you receive a subsidized Stafford loan, in essence you're getting a lot more money than you would get for an unsubsidized undergraduate Stafford Loan.

As an independent student your annual and lifetime limits for all Stafford Loans are higher and can be found at Unsubsidized Stafford Loans. Note that the limits for any subsidized portion of your total Stafford Loan debt is as noted above, regardless of your status as a dependant or independent student.

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The unsubsidized Stafford Loan - everyman's loan

In addition to your EFC score, eligibility requirements for the subsidized Stafford Loan are as follows. You must:

  • Be a United States citizen or an eligible noncitizen with a valid social security number
  • Demonstrate financial need
  • Be working toward a degree or certificate in an eligible program
  • Have a high school diploma, GED or pass an approved ability-to-benefit (ABT) test
  • Register with the Selective Service if you're a male between 18 and 25
  • Maintain satisfactory academic progress

If you satisfy all of the requirements and are offered a subsidized Stafford Loan, it's in your interest to take out the maximum amount allowed before you look to other loan sources. It's important to note that you may not be subsidized for loans in the amounts listed above. You can read our article on Subsidized vs. Unsubsidized Stafford Loans to learn more. In those cases you can take out additional unsubsidized Stafford Loans until you reach the annual federal Stafford Loan limits. And of course you have many private and alternative loan options to help you make up any unmet need.

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