Subsidized and unsubsidized loans, also known as Stafford Loans, are Federal student loans that allow you to borrow money for the cost of college. These loans are among the most common student loans made to undergraduate and graduate students.
Compared to other forms of borrowing, Stafford Loans, especially subsidized loans, can be a good way to borrow money for your education. If you took out a Stafford Loan (or a “Direct” loan) to pay for your education, it’s important to understand what you borrowed, and how to pay it back.
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What Are Stafford Loans?
Stafford Loans are Direct Subsidized and Unsubsidized Federal student loans that most U.S. students can use to pay for qualified educational programs.
To qualify for a Stafford Loan, you must fill out the Free Application for Federal Student Aid (FAFSA). Direct Loans (along with interest rates and fees) will be included in your award package. You may choose to accept or decline these loans.
If you choose to accept the loan, you’ll complete entrance counseling to be sure you understand the terms of the loan (and repayment), and you’ll sign a Master Promissory Note that outlines the exact terms of your loan.
Unfortunately, most people I know who went through the counseling didn’t really understand how the loan worked. Or perhaps they understood the math, but when you’re 18 years old, the consequences of taking on debt aren’t totally clear. If you took on debt as an undergraduate (or as a graduate student), it’s likely you took out a Stafford Loan (now called a Direct Loan).
Do I Have to Repay a Stafford Loan?
As with every student loan, you are responsible to pay a Stafford Loan. Stafford Loans can have repayment periods lasting from 10 to 25 years. The standard repayment period is 10 years, but you can consolidate the loans which gives you a longer repayment period.
Additionally, if you’re struggling to repay the debt, you can opt to put your loans on an income-driven repayment plan (such as PAYE, REPAYE, Income-Based Repayment, or Income-Contingent Repayment).
As long as you do not refinance a Stafford Loan, the loan is eligible for Public Service Loan Forgiveness (PSLF) if you work in a qualifying occupation (and maintain a qualifying repayment plan). Direct Loans are also discharged after 25 to 30 years of timely repayment no matter what your occupation is. However, the discharge may come with a tax bomb because you will owe taxes on the amount discharged.
What Are the Interest Rates and Fees on Stafford Loans?
The exact interest rates on Stafford Loans depend on when you took out the loans. These are the current interest rates for the various types of loans.
With subsidized loans, the Department of Education pays your interest while you’re in school (more than half-time), during a six-month grace period following graduation, and during select deferments. That means your loan balance won’t grow during those times.
By contrast, you are responsible for interest that accrues on unsubsidized loans. That means even though you don’t have to make payments during school (or during your six-month grace period), your loan balance will continue to grow.
As a rule of thumb, always take subsidized loans before taking unsubsidized loans if you're offered them.
Current Interest Rates
Direct Subsidized Loans*
Direct Unsubsidized Loans
Graduate or professional
Stafford Loan borrowers also pay upfront loan fees. These are subtracted from the amount disbursed by the school. These are the fees for the two most recent school years. Your actual upfront fee depended on when you took out the loan.
Upfront Loan Fee
On or after Oct. 1, 2020, and before Oct. 1, 2021
On or after Oct. 1, 2021, and before Oct. 1, 2022
Should I Take Out a Stafford Loan?
As a college or graduate student, you need to pay for your education somehow. Before taking on debt, look for options to pay your way through school.
Many people can work part-time or even full-time during their undergraduate careers. The earnings from your work combined with scholarships and frugal living may make it possible to avoid undergraduate debt.
But if you can’t avoid debt, a Stafford Loan is a good option. You will have several repayment options when you graduate, and the interest rate is reasonable.
Graduate students (especially law students or medical students) don’t always have as many opportunities to work. If you can fund your education through scholarships, work as a teacher’s assistant, or work as a research assistant, this is ideal.
However, if that doesn’t work, a Stafford Loan is a good first option for borrowing. Just be sure to understand your repayment options (and your salary expectations) before taking it out.
Direct student loans are an important way to fund university education in the United States. But it’s still important to be careful with borrowing and to consider repayment options.
If you took out a Stafford Loan, take the time to study your repayment options. If necessary, get on a repayment plan, so the loans don’t interfere with your financial health. In time, you may have sufficient income to attack the loans and get rid of them once and for all.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.