Understanding The Basics Of Stafford Student Loans

Understanding The Basics Of Stafford Student Loans

by Donald Saunders

Back in 1965 Congress instituted the Federal Family Education Loan Program in order to provide financial aid to students. One element of this loans program is Stafford loans which were originally intended only to assist those students in very real financial need but which today represent over 90% of all Federal education loans.

Since their inception Stafford loans have evolved to take account of changing conditions and nowadays there are two main types of the loan - subsidized and unsubsidized Stafford loans.

For subsidized loans the Federal Government accepts responsibility for paying any interest accruing on a loan from the date of issue until the student is required to start making repayments. Usually a student will not have to make repayments while he remains enrolled in a program of study which is considered to be a 'half-time' or greater course of study and for a grace period of six months after the conclusion of his course. However, a student may begin to make payments earlier if he so chooses.

Since the interest on the loan is being subsidized, these loans are normally only granted on the basis of need and officials will look at both a student's and the family's income when deciding whether a student qualifies for a subsidized Stafford loan. Students are required to fill out a Free Application for Federal Student Aid application form which includes details of income and the student will then be assigned a number called the Expected Family Contribution calculated from the declared income.

About two-thirds of all subsidized Stafford loans are provided to students whose parents have an Adjusted Gross Income of less than $50,000 per year. A further one-quarter are awarded to those in the $50-100,000 per year bracket. Thereafter the definition of 'need' becomes a little fuzzy and slightly under one-tenth of subsidized loans are allocated to students with a combined family income of over $100,000.

For those students who do not meet the requirements for a subsidized loan most will qualify for an unsubsidized Stafford loan. The main difference here is that students will be required to meet all loan interest payments, although once again payment will not generally start until six months after the completion of the student's course.

The mechanics of an unsubsidized Stafford loan means that a loan can be reasonably costly because the interest accumulates during the period of study and so the capital sum on which repayment will eventually need to be made will also grow. Let's look at a very simplified example.

Let's say that a student borrows $5,000 at the start of his first year of study at an interest rate of 6.8%. After one year the interest due is $340 which will be added to the loan capital. During the next year the student will accrue interest on the new capital sum of $5,340 at 6.8% which will come to some $363 raising the total debt at the end of the second year to $5,703. Of course this is not wholly accurate because interest is in fact calculated and added on a monthly basis but it does nonetheless illustrate the principles underlying this form of loan.

Depending on the sum of money which is borrowed every year and the time before repayment starts it can be seen that students can pay a relatively high price for the benefit of delaying the repayment of a Stafford loan.

In spite of the apparently high cost it needs to be borne in mind that many of the alternative methods for funding a college education are considerably more costly and that many students would simply not be able to afford to attend college without a Stafford loan.