An Examination Of The Basics Of Stafford Student Loans

In 1965 the United States Congress created the Federal Family Education Loan Program in order to give financial aid to students. One element of this program is Stafford loans which were originally intended to assist only students in very real financial need but which nowadays account for more than 90% of all Federal Government student loans.

Over the years Stafford loans have evolved with changing conditions and now there are two types of the loan - subsidized and unsubsidized.

In the case of subsidized loans the Federal Government assumes responsibility for paying any interest accruing on a loan from the date of issue until the student is required to start making repayments. In normal circumstances a student does not have to make repayments while he stays enrolled on a program of study which is classed as being a 'half-time' or greater course of study and for a period of up to six months following the conclusion of his course. However, a student can begin making payments at an earlier date if he so chooses.

Because interest on the loan is subsidized, loans are usually only granted in cases of need and aid officials will take into account both a student's and the family's income when determining whether or not the student qualifies for a subsidized Stafford loan. Students must fill out a Free Application for Federal Student Aid application which includes income details and the student will then be assigned a number referred to as the Expected Family Contribution calculated from the income figures provided.

In the region of two-thirds of subsidized Stafford loans are provided to students with parents who have an Adjusted Gross Income of less than $50,000 a year. A further one-quarter are awarded to families in the $50-100,000 a year range. After this the definition of the term 'need' gets somewhat blurred and slightly under one-tenth of loans are granted to students with a combined family income of greater than $100,000.

For students who do not qualify for a subsidized loan the majority will be eligible for an unsubsidized Stafford loan. Here the main difference is that students are required to meet all interest payments on the loan, though once again payment do not normally start until six months after the completion of the student's course.

An unsubsidized Stafford loan can be quite costly as interest accumulates over the period of study and so the capital sum for eventual repayment will also grow. Let us consider an extremely simplified example.

Let us assume that a student borrows the sum of $5,000 at the start of his first year at an interest rate of 6.8%. At the end of the year the interest due is $340 which will be added to the loan capital. During the next year the student will accrue interest on $5,340 at 6.8% which will amount to roughly $363 raising the total debt at the end of the second year to $5,703. Of course this is not entirely accurate as interest is calculated and added on a monthly basis but it does nevertheless show the principles underlying this form of loan.

Depending on the amount of money which the student borrows every year and the length of time before repayment begins it can be seen that students can pay a quite high price for the benefit of delaying the repayment of this form of education loan.

In spite of the apparently high cost it needs to be borne in mind that many of the alternative methods of meeting the cost of a college education can be considerably more costly and that a lot of students could simply not afford to go to college without the Stafford loans scheme.