The Difference Between a Direct Stafford Loan & an Unsubsidized Stafford Loan

Stafford loans are one of the main ways that students can borrow money for college through the federal government. These loans are issued to undergraduate and graduate students to pay for qualifying college expenses. Direct and unsubsidized are two characteristics that can be used to describe some, but not all, types of Stafford loans.

Direct vs. FFEL

Starting July 1, 2010, the federal government only offers direct Stafford loans. They are called direct loans because the federal government is the lender, so they come directly from the government. Before July 1, 2010, students could also take out Stafford loans through the Federal Family Education Loan (FFEL) program. This program allowed private lenders to disburse Stafford loans with a government guarantee against default. Therefore, some students are still paying back FFEL Stafford loans, but all new loans are direct Stafford loans.

Government Subsidization

Some Stafford loans are subsidized by the government, whereas others are unsubsidized. Loans issued both under the FFEL program and under the Direct Loan program can be subsidized or unsubsidized. With a subsidized loan, the federal government pays for all interest that accrues on the balance while the student is in school or while the loan payments are deferred for any other reason. This prevents the loan balance from increasing while the student is not making payments and saves the student money. Only some students qualify for subsidized Stafford loans, whereas almost all students can get unsubsidized Stafford loans.

Interest Rate

Most unsubsidized and subsidized Stafford loans disbursed since July 1, 2006 have a fixed interest rate of 6.8 percent, regardless of whether they are direct loans or FFEL loans. The exception is subsidized Stafford loans disbursed to undergraduate students after July 1, 2008. The interest rate was 6 percent for loans disbursed for the 2008 to 2009 school year, 5.6 percent for the 2009 to 2010 school year, 4.5 percent for the 2010 to 2011 school year and 3.4 percent for the 2011 to 2012 school year. As of April 2011, all Stafford loans disbursed before July 1, 2006 have a variable interest rate of 2.47 percent, or 1.87 percent for loans that are deferred or in a grace period. These rates reset every June.

Bottom Line

The categories of direct and unsubsidized overlap in the case of direct unsubsidized Stafford loans, which are the most widely available type of federal student loan. Therefore, people sometimes do not use the word "unsubsidized" to describe it. However, there are major differences in the way interest is handled with direct subsidized Stafford loans and direct unsubsidized Stafford loans, so students should be sure of which they are getting. Students who qualify for direct subsidized Stafford loans should take these before taking other types of student loans.