Some forty years ago now back in 1965 the United States Congress launched the Federal Family Education Loan Program in order to give financial assistance to students. One part of this loans program is Stafford loans which were originally designed only to help students in real financial need but which today account for more than ninety percent of all Federal education loans.
Over time Stafford loans have altered to take account of changing conditions and nowadays there are two types of the loan - subsidized and unsubsidized.
For subsidized loans the Government assumes responsibility for paying any interest accruing on a loan from the date of issue until the student is required to start repaying the loan. In normal circumstances a student does not have to make repayments as long as he remains enrolled in a program of study which is classed as being a 'half-time' or greater program and for a period of up to six months after the conclusion of his course. A student may however begin making payments at an earlier date if he wants to do so.
Because the interest on the loan is being subsidized, loans are usually only granted on the basis of need and aid officials will examine both a student's and his family's income when determining whether or not a student qualifies for a subsidized Stafford loan. Students are required to complete a Free Application for Federal Student Aid (FAFSA) application form which includes income details and the student is then given a number called the Expected Family Contribution calculated from the income figures provided.
In the region of two-thirds of all subsidized Stafford loans are provided to students with parents who have an Adjusted Gross Income of under $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 meaning of the term 'need' becomes somewhat blurred and slightly under one-tenth of loans are given to students with a combined family income of over $100,000.
For students who do not qualify for a subsidized loan most will qualify for an unsubsidized Stafford loan. Here the major difference is that the student will be required to meet all loan interest payments, although again payment will not generally start until six months after the end of the student's course of study.
An unsubsidized Stafford loan can be relatively costly as the interest accumulates during the period of study and so the capital sum for eventual repayment will also grow. Let's consider an extremely simplified example.
Let us assume that a student borrows the sum of $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 is $340 and this will be added to the loan. During 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 after two years to $5,703. Of course this is not completely accurate as interest is calculated and added monthly but it does nevertheless show the principles underlying this form of loan.
Dependent upon the sum of money which the student borrows 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 this ostensibly high cost it has to be remembered that many of the alternative methods for funding a college education can be much more costly and that a lot of students would simply not be able to afford to attend college without the Stafford loans scheme.
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