Over 40 years ago now back in 1965 Congress set up the Federal Family Education Loan Program (FFELP) to provide financial assistance to students. One element of this program is Stafford loans which were initially intended only to assist those students in real financial need but which now comprise in excess of 90% of all Federal student loans.
Over time 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 Federal Government assumes responsibility for the payment of any interest which accrues on a loan from the date of issue until the student has to start making repayments. Normally a student will not be required to make repayments as long as he stays enrolled on a program of study which is classed as being a 'half-time' or greater program and for a grace period of up to six months following the conclusion of his course. A student can however start to make payments at an earlier point if he so chooses.
Since interest is subsidized, these loans are usually only granted in cases of need and aid officials will examine both a student's and his family's income when determining whether or not the student qualifies for a subsidized Stafford loan. Students have to fill out a Free Application for Federal Student Aid (FAFSA) application form which includes details of income and the student is then given a number referred to as the Expected Family Contribution (EFC) calculated from the declared income.
About two-thirds of all subsidized Stafford loans are provided to students with parents having an Adjusted Gross Income of less than $50,000 a year. Another one-quarter are provided to those in the $50-100,000 a year bracket. After this the definition of 'need' becomes somewhat blurred and slightly less than one-tenth of subsidized loans are provided to students whose combined family income is greater than $100,000.
In the case of those students who do not meet the requirements for a subsidized loan the majority will be eligible for an unsubsidized Stafford loan. Here the major difference is that the student have to meet all loan interest payments, though once more payment will not normally start until six months after the end of the student's course.
Unsubsidized Stafford loans can be very expensive because interest accumulates over the period of study and so the capital sum for eventual repayment will also grow. Let us consider an extremely simplified example.
Let us say that a student borrows $5,000 at the start of his first year and that the interest rate is 6.8%. At the end of the year the interest accrued will be $340 and this will be added to the loan capital. During the following year the student will then accrue interest on $5,340 at 6.8% and this will amount to roughly $363 raising the total debt at the end of the second year to $5,703. This example is not completely accurate because interest is calculated and added on a monthly basis but it does nonetheless show the principles underlying this type of loan.
Depending on the amount of money which is borrowed every year and the length of time before repayment starts it can be seen that a student can pay a reasonably high price for the benefit of delaying the repayment of a Stafford loan.
In spite of the ostensibly high cost it needs to be borne in mind that a lot of the alternative methods of funding a college education are considerably more expensive and that many students could not afford to attend college without a Stafford loan.
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