Back in 1965 Congress instituted the Federal Family Education Loan Program (FFELP) in order to give financial aid to students. One part of this program is Stafford loans which were initially intended only to assist those students in real financial need but which nowadays make up over 90% of all Federal Government education loans.
Over the years Stafford loans have evolved to take account of changing conditions and now there are two main types of the loan – subsidized and unsubsidized Stafford loans.
In the case of subsidized loans the Federal Government takes responsibility for the payment of interest that accrues on a loan from the date of issue until the date on which the student is required to begin making repayments. Generally a student does not have to make repayments as long as he is enrolled on a program of study that is classed as being a ‘half-time’ or greater program and for a grace period of six months following the conclusion of his course. However, a student can start to make payments at an earlier date if he wishes to do so.
Because interest is being subsidized, these loans are usually granted only in cases of need and aid officials will examine both a student’s and his family’s income when deciding whether or not a student qualifies for a subsidized Stafford 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 called the Expected Family Contribution (EFC) calculated from the income figures provided.
About two-thirds of all subsidized Stafford loans are granted to students with parents who have an Adjusted Gross Income of under $50,000 per year. A further one-quarter are granted to families in the $50-100,000 per year range. Thereafter the meaning of the term ‘need’ gets somewhat fuzzy and slightly under one-tenth of subsidized loans are provided to students with a combined family income of greater than $100,000.
For those students who do not meet the requirements for a subsidized loan most will qualify for an unsubsidized Stafford loan. Here the major difference is that the student have got to meet all loan interest payments, though again payment do not usually begin until six months after the completion of the student’s course.
Unsubsidized Stafford loans can be reasonably costly as interest accumulates over the period of study and so the capital sum on which repayment will eventually need to be made will also grow. Let us look at an extremely simplified example.
Say a student borrows $5,000 in his first year and that the interest rate is 6.8%. At the end of the year the interest due is $340 and this will be added to the loan. During the second year the student will accrue interest on $5,340 at 6.8% and this will amount to some $363 increasing the total debt at the end of the second year to $5,703. Naturally 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 form of loan.
Dependent upon the amount of money that is borrowed every year and the length of time before repayment begins it can be seen that students can pay a quite high price for the benefit of delaying the repayment of a Stafford loan.
Despite the seemingly high cost it must be remembered that a lot of the alternative methods of meeting the cost of a college education are considerably more costly and that a lot of students could simply not afford to attend college without a Stafford loan.