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An Introduction To The Principles Of The Government Stafford Loans Scheme

By: Donald Saunders

More than 40 years ago now back in 1965 the United States Congress established the Federal Family Education Loan Program (FFELP) to provide financial aid to students. One part of this loans program is Stafford loans which were initially designed only to assist those students in real financial need but which now account for over ninety percent of all Federal Government education loans.

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

For subsidized loans the Government assumes responsibility for the payment of any interest accruing on a loan from the date of issue until the date on which the student is required to start making repayments. Normally a student does not have to make repayments as long as he stays enrolled in a program of study that is classed as being a 'half-time' or greater program and for a period of six months after the end of his course. A student can however start making payments sooner if he wishes to do so.

Because interest is subsidized, these loans are usually granted only on the basis of need and aid officials will consider both a student's and the family's income when deciding whether or not a student qualifies for a subsidized Stafford loan. Students need to complete a Free Application for Federal Student Aid application form that includes details of income and the student is then given a number called the Expected Family Contribution calculated from the declared income figures.

Approximately two-thirds of all subsidized Stafford loans are allocated to students with parents having an Adjusted Gross Income of under $50,000 a year. Another one-quarter of subsidized loans are provided to families in the $50-100,000 a year bracket. Thereafter the meaning of 'need' gets a little blurred and slightly less than one-tenth of loans are allocated 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 the majority will be eligible for an unsubsidized Stafford loan. The major difference here is that the student must meet all interest payments on the loan, although again payment do not usually start until six months after the completion of the student's course of study.

Unsubsidized Stafford loans can be quite expensive as interest accumulates during the period of study and so the capital sum for eventual repayment will also grow. Let us take a very simplified example.

Let's assume that a student borrows $5,000 at the start of his first year and that the interest rate is 6.8%. After one year the interest accrued is $340 and this will be added to the loan. In the second year the student will accrue interest on the new capital sum of $5,340 at 6.8% and this will come to about $363 raising the total borrowed after two years to $5,703. This example is not entirely accurate as interest is in fact calculated and added on a monthly basis but it does nevertheless illustrate the principles underlying this type of loan.

Depending on the sum of money that the student borrows each year and the length of time before repayment starts it can be seen that students can pay a quite high price for delaying the repayment of this form of education loan.

In spite of the ostensibly high cost it has to be remembered that a lot of the alternative methods of meeting the cost of a college education can be considerably more expensive and that many students could simply not afford to go to college without a Stafford loan.

Article Source: Main Articles

TheStudentLoansCenter.com provides information on Stafford college loans and Federal and State student loans and grants

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