A Beginner's Guide to America's Most Popular Student Loan

Student loans — can’t live with ‘em, but it seems most of us can’t live without them either. Higher education costs are on the rise and the cost and financing of your (or your child’s) college tuition can be tricky to navigate.

It’s a good idea to check out a student loan calculator to learn how much your monthly payments are or will be. It’s also important to do your research about all the different types of student loans. Let’s start things off by getting all the details of the federal government’s primary student loan option for undergraduates — the Stafford Loan. Whether you are a new grad just figuring out what you’ve gotten yourself into or a parent of a high school student trying to be prepared, here’s what you need to know.

Basics

The federal Stafford Loan is the most popular student loan program, offering a low origination fee as well as low, fixed interest rates. (For Stafford Loans disbursed in 2015-2016, the origination fee is about 1% and the interest rate is 4.29%.) Unlike other forms of loans and debts, the interest rate does not depend on the borrower’s income or credit score — it is the same for everyone. Stafford loans are meant to supplement existing personal and family resources for higher education, including any scholarships and grants. These funds can be used to cover the cost of tuition, room and board, books and other education-related expenses.

Eligibility

To qualify for these federal loans, you must be attending college at least half time and have filed a Free Application for Federal Student Aid (FAFSA). Further, there are two types of the Stafford Loan: subsidized and unsubsidized. The subsidized version is based on demonstrated financial need as exhibited on the FAFSA application.

Unsubsidized Stafford Loans are for those who are deemed not to have significant financial need. They are also available to graduate and professional students (with a limit of $138,500, including all federal loans received as an undergraduate student).

Both subsidized and unsubsidized Stafford Loans offer low fees and low rates compared to most private student loans. However, a great credit score could actually get you a lower rate on a private student loan, depending on the lender. You can see where your credit scores stand for free on Credit.com before you start shopping around.

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Subsidized vs. Unsubsidized

There is a difference in the way interest accumulates on the subsidized loans compared to the unsubsidized. For the subsidized loan, the government will pay the interest on your loan until you finish school (as long as you are a student at least half-time) and during a six-month grace period once you leave school. With unsubsidized loans, interest accumulates and is added to the principal while you are in school (as well as during grace, deferment and forbearance periods). Federal loans offer multiple repayment options that private loan programs may not, helping borrowers with limited income get a more manageable monthly payment.

Drawbacks

One potential drawback of the Stafford Loan is that money is not given all at once, but is instead dependent upon yearly tuition and subject to change. There are also lower limits than in other loan programs. Of course, you will have to pay interest — which isn’t unique to the Stafford Loan but is never fun.