In 1965 the US Congress established the Federal Family Education Loan Program to provide financial aid to students. One part of this loans program is Stafford student loans which were originally intended only to help students in real financial need but which today comprise in excess of 90% of all Federal Government education loans.
Over the years Stafford college loans have evolved with changing conditions and now there are two forms of the loan – subsidized and unsubsidized.
For subsidized loans the Federal Government accepts responsibility for paying any interest that accrues on a loan from the date of issue until the date on which the student has to start repaying the loan. Generally a student does not have to make repayments as long as he stays enrolled in a program of study that is considered to be a ‘half-time’ or greater program and for a period of six months following the end of his course. A student can however begin making payments sooner if he wants to do so.
Since interest is being subsidized, loans are generally only granted in cases of need and officials will examine both a student’s and the family’s income when deciding whether or not the student qualifies for a subsidized Stafford college loan. Students have to fill out a Free Application for Federal Student Aid application form that includes details of income and each student is then assigned a number known as the Expected Family Contribution (EFC) calculated from the declared income.
Around two-thirds of all subsidized Stafford loans are granted to students with parents having an Adjusted Gross Income of less than $50,000 a year. A further one-quarter of subsidized loans are granted to families in the $50-100,000 a year bracket. After this the definition of ‘need’ becomes a bit blurred and slightly under one-tenth of loans are given to students with a combined family income of in excess of $100,000.
For 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 must meet all loan interest payments, although once again payment will not generally start until six months after the end of the student’s program of study.
The workings of an unsubsidized Stafford loan means that a loan can be relatively costly as interest accumulates over the period of study and so the capital sum for eventual repayment will also increase. Let’s consider a very simplified example.
Let’s say that a student borrows $5,000 at the start of his first year at an interest rate of 6.8%. At the end of the year the interest due is $340 which will be added to the loan capital. During the following year the student will then accrue interest on the new capital sum of $5,340 at 6.8% which will amount to about $363 raising the total borrowed after two years to $5,703. Naturally this example is not completely accurate as interest is calculated and added monthly but it does nevertheless show the principles underlying this type of loan.
Dependent upon the sum of money that is borrowed every year and the time before repayment starts we can see that students can pay a quite high price for the benefit of delaying the repayment of a Stafford loan.
Despite the apparently high cost it has to be remembered that many of the alternative methods of meeting the cost of a college education are considerably more costly and that a lot of students would not be able to afford to attend college without Stafford college loan money.
Learn more about The Federal Family Education Loan Program and Stafford Loans