An
Introduction To The Basics Of The Stafford Student Loan
By Don
Saunders
In 1965 Congress created the Federal Family Education Loan Program (FFELP)
in order to provide financial aid to students. One element of this loans
program is Stafford loans which were originally intended only to help those
students in real financial need but which now comprise more than ninety
percent of all Federal student loans.
Over time Stafford loans have altered to take account of changing conditions
and now there are two forms of the loan - subsidized and unsubsidized
Stafford loans.
In the case of subsidized loans the Federal Government assumes
responsibility for the payment of any interest that accrues on a loan from
the date on which the loan is issued until the student has to start repaying
the loan. Generally a student will not have to make repayments while he is
enrolled on a program of study that is considered to be a 'half-time' or
greater program and for a period of six months after the conclusion of his
course. A student can however begin to make payments sooner if he wants to
do so.
Because interest is subsidized, these loans are usually granted only on the
basis of need and officials will take into account both a student's and his
family's income when deciding whether or not a student qualifies for a
subsidized Stafford loan. Students are required to complete a Free
Application for Federal Student Aid application that includes income details
and the student will then be assigned a number known as the Expected Family
Contribution (EFC) calculated from the declared income.
Around two-thirds of subsidized Stafford loans are allocated to students
with parents who have an Adjusted Gross Income of less than $50,000 per
year. A further one-quarter are awarded to families in the $50-100,000 per
year range. After this the meaning of 'need' becomes somewhat fuzzy and
slightly under one-tenth of loans are given to students with a combined
family income of over $100,000.
In the case of those students who do not qualify for a subsidized loan most
will qualify for an unsubsidized Stafford loan. The major difference here is
that students must meet the interest payments on the loan, although again
payment will not usually start until six months after the end of the
student's program of study.
An unsubsidized Stafford loan can be reasonably costly as interest builds
during the period of study and so the capital sum for eventual repayment
will also grow. Let us consider a very simplified example.
Let us say that a student borrows $5,000 in his first year of study at an
interest rate of 6.8%. After one year the interest due is $340 and this will
be added to the loan capital. During the second year the student will accrue
interest on $5,340 at 6.8% and this will come to approximately $363 raising
the total debt after two years to $5,703. This example is not wholly
accurate as interest is in fact calculated and added monthly but it does
nevertheless demonstrate the principles of this form of loan.
Dependent upon the sum of money that is borrowed each year and the length of
time before repayment begins we can see that students can pay a reasonably
high price for the benefit of delaying the repayment of a Stafford loan.
In spite of this seemingly high cost it should be remembered that a lot of
the alternative methods of meeting the cost of a college education are much
more costly and that many students would simply not be able to afford to
attend college without a Stafford loan.
