Examining The Basics Of Stafford Student Loans

More than forty years ago now back in 1965 Congress launched the Federal Family Education Loan Program (FFELP) in order to give financial aid to students. One element of this program is Stafford loans which were originally designed to assist only students in real financial need but which now account for over 90% of all Federal student loans.

Since their inception Stafford loans have altered with changing conditions and now there are two types of the loan - subsidized and unsubsidized Stafford loans.

When it comes to subsidized loans the Federal Government takes responsibility for paying any interest accruing on a loan from the date on which the loan is issued until the date on which the student is required to begin making repayments. Usually a student will not be required to make repayments as long as he remains enrolled on 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 following the end of his course. A student may however begin to make payments earlier if he wants to do so.

Since the interest on the loan is subsidized, loans are usually granted only in cases of need and officials will consider both a student's and the family's income when determining whether or not the student qualifies for a subsidized Stafford loan. Students have to complete a Free Application for Federal Student Aid (FAFSA) application form which includes income details and each student is then given a number known as the Expected Family Contribution calculated from the declared income.

About two-thirds of subsidized Stafford loans are granted to students whose parents have an Adjusted Gross Income of less than $50,000 a year. A further one-quarter of subsidized loans are granted to those in the $50-100,000 a year bracket. After this the definition of 'need' gets a little blurred and slightly less than one-tenth of subsidized loans are provided to students with a combined family income of greater than $100,000.

In the case of students who do not qualify for a subsidized loan the majority will qualify for an unsubsidized Stafford loan. The major difference here is that the student have got to meet the loan interest payments, although once again payment will not normally begin until six months after the completion of the student's course.

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

Let's assume that a student borrows the sum of $5,000 in his first year and that the interest rate is 6.8%. At the end of the year the interest accrued is $340 and this will be added to the loan capital. In the second year the student will accrue interest on $5,340 at 6.8% and this will come to approximately $363 increasing the total debt after two years to $5,703. Of course this is not wholly accurate as interest is in fact calculated and added on a monthly basis but it does nonetheless illustrate the principles of this form of loan.

Depending on the sum of money which is borrowed every year and the length of time before repayment begins you can see that students can pay a quite high price for delaying the repayment of a Stafford loan.

Despite the apparently high cost it ought to be remembered that many of the alternative methods for funding a college education can be much more costly and that many students could simply not afford to go to college without a Stafford loan.