Stafford Loans


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Unlike a grant or scholarship, you have to repay a student loan. Student loans can be issued to either you or your parents. A Stafford loan is a federal loan program that is made directly to the student. Stafford loans come in two types: subsidized and unsubsidized.

Stafford loans are loans guaranteed by the federal government that are disbursed by the Federal Direct Student Loan Program (FDSLP).

A subsidized loan is a loan whose interest is paid by the federal government. An unsubsidized loan is one where you pay the interest on the loan. Since a subsidized loan is clearly the better deal, eligibility rules for these loans are much stricter than for unsubsidized loans. In order to be eligible for either type of Stafford loan, you must complete a Free Application for Federal Student Aid (FAFSA).

For the 2019-20 academic year, first-year students who are dependent on their parents' support can borrow up to $5,500 in Stafford loans of which only $3,500 may be subsidized. If they are independent of their parents, they can borrow up to $9,500 in their first year of which only $3,500 may be subsidized. Second-year borrowing limits increase to $6,500 and $10,500, respectively of which $4,500 may be subsidized. Third- through fourth-year borrowing limits increase to $7,500 and $12,500, respectively of which $5,500 may be subsidized.

For students enrolled in an undergraduate program and dependent on parents for financial support, the current total borrowing limit for Stafford loans is $31,000. If they are independent of their parents, the current total borrowing limit is $57,500. In either case, a maximum of $23,000 may be from a subsidized loan.

However, the ceiling on borrowing limits should not be a license to borrow all that you can. Other sources of income, including part-time work and sticking to a personal budget, can reduce the amount you need to borrow for college.

At 6% interest and $25,000 in student loans, a monthly payment for a five-year loan repayment plan is $483. If you extend the repayment plan to 10 years, you owe monthly payments of $278.

After you graduate, your lender gives you a grace period before you have to start repaying the loan. A grace period is typically six to nine months long. You may also be eligible for a loan deferment. A loan deferment is a temporary suspension of loan payments -- it is not debt forgiveness. Federal government service may be one potential reason for seeking a loan deferment.

If you experience a financial hardship during the repayment period, you can also request forbearance from your lender. Forbearance is temporary relief from making loan payments, often due to the loss of a job or similar financial duress. During the time that you receive forbearance, your interest expense is capitalized, or added to the amount you owe.

When you begin to repay a student loan, you owe accrued interest together with any capitalized interest. As a result, some of your early payments are applied entirely to interest with no reduction in loan principal. You should check with your lender on how your payments are applied to principal and interest. Monthly payments are often calculated for a specific repayment period such as 10 years. If you make extra or larger loan payments or either skip or make smaller payments, your loan period is likely to be different than 10 years.

The interest rate that you pay on a Stafford loan used to be reset every July 1. However, for loans disbursed between July 1, 2019 and June 30, 2020, the interest rate is fixed at 4.53% for undergraduate students and 6.08% for graduate students.

Additional loan amounts for graduate students. Graduate students can borrow up to a total of $65,500 and $138,500 for subsidized and unsubsidized loans, respectively including the amount borrowed as an undergraduate. For those in medical school, the total amount that may be borrowed is $224,000, $65,500 of which may be subsidized. Graduate students can borrow up to $20,500 ($40,500 for medical students) in a year.

It's important to keep in mind that you or your child may have more than one student loan. As a result, the types of loans and interest rates are likely to be different. When it comes time to repay those student loans, you may wish to consolidate them using a federal consolidation loan or other consolidation loan.

You can take a deduction for interest expense paid on student loans over the entire loan term. For taxpayers filing a single return in 2020, your allowable deduction begins to phase out when your modified adjusted gross income (MAGI) reaches $70,000. The allowable student-interest deduction phases out completely when your MAGI reaches $85,000. For married taxpayers filing a joint return, the increased income limits are $140,000 and $170,000, respectively in 2020.

To take a student loan interest deduction, enter the amount of the deduction on line 20 of IRS 2019 Form 1040 Schedule 1. If your income falls within the income limits shown above, see IRS Pub. 970 to calculate a partial deduction.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

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