Understanding The Basics Of The Government Stafford Loan Scheme

By Author: Donald Saunders
Total Articles: 84
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Back in 1965 the United States Congress launched the Federal Family Education Loan Program (FFELP) to provide financial aid to students. One element of this program is Stafford loans which were initially intended to help only those students in real financial need but which today comprise in excess of ninety percent of all Federal Government student loans.

Over the years Stafford loans have evolved to take account of changing conditions and today there are two main forms of the loan - subsidized and unsubsidized Stafford loans.

When it comes to subsidized loans the Government assumes responsibility for the payment of any interest accruing on a loan from the date of issue until the student has to start repaying the loan. Normally a student does not have to make repayments as long as he remains enrolled in a program of study which is considered to be a 'half-time' or greater program and for a period of six months after the end of his course. However, a student may begin to make payments at an earlier point if he so chooses.

As the interest is subsidized, loans are normally granted only on the basis of need ...
... and aid officials will consider both a student's and his family's income when deciding whether the student qualifies for a subsidized Stafford loan. Students need to complete a Free Application for Federal Student Aid application which includes income details and the student will then be assigned a number called the Expected Family Contribution calculated from the income figures provided.

Approximately two-thirds of all subsidized Stafford loans are provided to students with parents who have an Adjusted Gross Income of under $50,000 per year. Another one-quarter of subsidized loans are awarded to those in the $50-100,000 per year range. After this the definition of the term 'need' becomes a bit blurred and slightly less than one-tenth of subsidized loans are provided 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 main difference here is that students have to meet all loan interest payments, though again payment will not normally start until six months after the completion of the student's program of study.

The workings of unsubsidized Stafford loans means that a loan can be reasonably expensive as the interest builds during the period of study and so the capital sum on which repayment will eventually need to be made will also increase. Let's look at an extremely simplified example.

Let us assume 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 which will be added to the loan capital. In the second year the student will accrue interest on the new capital sum of $5,340 at 6.8% which will amount to approximately $363 raising the total borrowed at the end of the second year to $5,703. Of course this is not entirely accurate as interest is calculated and added monthly but it does nonetheless illustrate the principles underlying this form of loan.

Dependent upon the sum of money which is borrowed every year and the time before repayment begins we can see that students can pay a reasonably high price for delaying the repayment of a Stafford loan.

In spite of the ostensibly high cost it must be remembered that a lot of the alternative methods for funding a college education can be considerably more expensive and that a lot of students would simply not be able to afford to attend college without a Stafford loan.