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A Look At The Principles Of The Stafford Student Loan

Some 40 years ago now back in 1965 the US Congress launched the Federal Family Education Loan Program to provide financial assistance to students. One part of this loans program is Stafford loans which were initially designed to assist only students in real financial need but which today comprise in excess of 90% of all Federal Government education loans.

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

In the case of subsidized loans the Federal Government takes responsibility for paying interest accruing on a loan from the date of issue until the date on which the student has to start repaying the loan. Normally a student will not be required to make repayments as long as he is enrolled in a program of study that is classed as being a 'half-time' or greater course of study and for a period of up to six months after the conclusion of his course. A student can however start making payments at an earlier point if he wants to do so.

As interest is being subsidized, these loans are generally only granted on the basis of need and officials will consider both a student's and his family's income when determining whether the student qualifies for a subsidized Stafford loan. Students need to fill out a Free Application for Federal Student Aid (FAFSA) application form that includes income details and each student is then given a number known as the Expected Family Contribution (EFC) calculated from the income figures provided.

Roughly two-thirds of subsidized Stafford loans are allocated to students with parents who have an Adjusted Gross Income of less than $50,000 a year. A further one-quarter of subsidized loans are provided to those in the $50-100,000 a year bracket. After this the definition of the term 'need' becomes a little fuzzy and slightly less than one-tenth of loans are given to students with a combined family income of over $100,000.

In the case of students who do not meet the requirements for a subsidized loan the majority will qualify for an unsubsidized Stafford loan. Here the main difference is that the student must meet all interest payments on the loan, though once again payment will not normally start until six months after the end of the student's course of study.

The mechanics of an unsubsidized Stafford loan means that a loan can be very costly as interest builds over the period of study and so the capital sum on which repayment will eventually need to be made will also increase. Let's consider a very simplified example.

Say a student borrows $5,000 at the start of his first year of study at an interest rate of 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 then accrue interest on the new capital sum of $5,340 at 6.8% and this will amount to some $363 increasing the total borrowed at the end of the second year to $5,703. This example is not completely accurate as interest is calculated and added on a monthly basis but it does nonetheless show the principles of this form of loan.

Depending on the sum of money that the student borrows every year and the length of time before repayment begins it can be seen that students can pay a reasonably high price for the benefit of delaying the repayment of a Stafford loan.

Despite this ostensibly high cost it has 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.