College students in need of extra cash to fund their education now have another reason to look into subsidized Stafford loans: Rates on loans for undergraduate students are dropping and are expected to do so during the next two academic years.

Rates on subsidized Stafford loans are fixed, which means they remain the same throughout the life of the loan. Currently, for the 2009-10 academic year, subsidized Stafford loan rates are 5.6%. That s down from the loans that were distributed for 2008-09, which had rates of 6%. This rate is expected to drop even further to 4.5% for loans for the 2010-11 academic year and to 3.4% for loans distributed for the 2011-12 year.

What s behind this decreasing rate is the College Cost Reduction and Access Act of 2007, which includes a pledge to incrementally lower the interest rate on subsidized Stafford loans for undergraduates distributed through July 1, 2012. Although the program has been scaled back the initial plan was to cut interest rates on most federal student loans in half even the new rates can help students save thousands of dollars.

To qualify for a subsidized Stafford loan, incoming and continuing undergraduate students must file the Free Application for Federal Student Aid (FAFSA), which is available online (it can be submitted online as well) at fafsa.ed.gov. While the federal deadline for the 2010-11 academic year is June 30, 2011, students should file the FAFSA during the next couple of months; colleges have their own deadlines for the FAFSA, most of which are in February and March.

Next, students need to demonstrate financial need, which is determined by the Department of Education and the colleges they re applying to. Although there is no official income threshold for qualification, about two-thirds of subsidized Stafford loans are awarded to students whose parents have an adjusted gross income (AGI) of under $50,000, one-fourth go to students whose parents AGI is between $50,000 and $100,000, and less than 10% go to students whose parents AGI is over $100,000, says Mark Kantrowitz, founder of FinAid.org, which tracks federal student loans. Students also need to enroll at least half time in a college. (Students who are in default or delinquent on any existing federal loan are disqualified from receiving a subsidized Stafford loan.)

There s a limit to the dollar amount that a dependent student can receive in Stafford loans. For freshmen, the maximum unsubsidized Stafford loan that they can receive is $5,500 per year of which no more than $3,500 can be a subsidized Stafford loan. For sophomores, the total unsubsidized Stafford amount rises to $6,500, and of that, the subsidized Stafford loan can be a maximum of $4,500. Juniors and seniors can qualify for up to $7,500 in unsubsidized Stafford loans each year with a maximum of $5,500 in subsidized Stafford loans per year.

After the free money a student receives this includes federal or state grants and scholarships the second best type of financial aid to qualify for is a subsidized federal student loan. The rates on subsidized Stafford loans are lower than the unsubsidized version, which has been set at 6.8% since July 2006 and is expected to remain there through 2012. With a subsidized Stafford loan, the government makes the interest payments while the student is in college; with unsubsidized Stafford loans, interest accrues while the student is in school and gets tacked on to the balance after graduation.

In addition, for the 2010-11 academic year, subsidized Stafford loan rates will be lower than the rate offered on another subsidized loan the Perkins loan, which is available to undergraduate and graduate students with financial need and has a fixed rate of 5%. (This is the case assuming new legislation stuck in the Senate that could overhaul Perkins loans doesn't go into effect by then.) As of now, one advantage that the Perkins loans would retain will be a longer grace period (the time during which you re not expected to make payments on student loans, which typically occurs immediately after graduation) of nine months compared to the Stafford loan s six-month grace period.

Beyond 2012, the future of subsidized Stafford loan rates is uncertain. As of now, rates are set to rise to 6.8% for the 2012-13 academic year unless legislation goes into effect to keep these rates lower. One option currently floating in Congress is to switch rates from fixed to variable with a maximum rate of 6.8%.