An Examination of the Basics of Stafford Student Loans
Friday, March 12th, 2010
Donald Saunders asked:
In 1965 the US Congress instituted the Federal Family Education Loan Program to give financial aid to students. One element of this program is Stafford loans which were initially intended only to assist students in very real financial need but which today make up over 90% of all Federal Government student loans.
Over time Stafford loans have altered with changing conditions and nowadays there are two forms of the loan – subsidized and unsubsidized Stafford loans.
When it comes to subsidized loans the Federal Government takes responsibility for the payment of any interest accruing on a loan from the date of issue until the date on which the student has to begin repaying the loan. In normal circumstances a student does not have to make repayments while he is enrolled on a program of study that is classed as being a ‘half-time’ or greater program and for a period of six months following the conclusion of his course. However, a student may begin to make payments sooner if he wants to do so.
Because interest on the loan is subsidized, these loans are normally only granted in cases 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 have to complete a Free Application for Federal Student Aid application form that includes details of income and each student is then given a number called the Expected Family Contribution (EFC) calculated from the declared income.
Approximately two-thirds of subsidized Stafford loans are provided to students whose parents have 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. At this point however the meaning of the term ‘need’ gets somewhat fuzzy and slightly less than one-tenth of subsidized loans are granted to students with a combined family income of greater than $100,000.
In the case of students who do not qualify for a subsidized loan the majority will be eligible for an unsubsidized Stafford loan. Here the main difference is that the student have got to meet all loan interest payments, although once more payment will not usually begin until six months after the completion of the student’s program of study.
Unsubsidized Stafford loans can be quite costly because interest accumulates during the period of study and so the capital sum for eventual repayment will also increase. 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 due will be $340 and this will be added to the loan capital. 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. Naturally this example is not completely accurate because interest is calculated and added monthly but it does nevertheless demonstrate the principles underlying this form of loan.
Depending on the sum of money that the student borrows every year and the time before repayment begins you can see that students can pay a relatively high price for delaying the repayment of this form of education loan.
In spite of the apparently high cost it ought to be remembered that a lot of the alternative methods for funding a college education can be considerably more costly and that a lot of students would not be able to afford to attend college without a Stafford loan.
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In 1965 the US Congress instituted the Federal Family Education Loan Program to give financial aid to students. One element of this program is Stafford loans which were initially intended only to assist students in very real financial need but which today make up over 90% of all Federal Government student loans.
Over time Stafford loans have altered with changing conditions and nowadays there are two forms of the loan – subsidized and unsubsidized Stafford loans.
When it comes to subsidized loans the Federal Government takes responsibility for the payment of any interest accruing on a loan from the date of issue until the date on which the student has to begin repaying the loan. In normal circumstances a student does not have to make repayments while he is enrolled on a program of study that is classed as being a ‘half-time’ or greater program and for a period of six months following the conclusion of his course. However, a student may begin to make payments sooner if he wants to do so.
Because interest on the loan is subsidized, these loans are normally only granted in cases 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 have to complete a Free Application for Federal Student Aid application form that includes details of income and each student is then given a number called the Expected Family Contribution (EFC) calculated from the declared income.
Approximately two-thirds of subsidized Stafford loans are provided to students whose parents have 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. At this point however the meaning of the term ‘need’ gets somewhat fuzzy and slightly less than one-tenth of subsidized loans are granted to students with a combined family income of greater than $100,000.
In the case of students who do not qualify for a subsidized loan the majority will be eligible for an unsubsidized Stafford loan. Here the main difference is that the student have got to meet all loan interest payments, although once more payment will not usually begin until six months after the completion of the student’s program of study.
Unsubsidized Stafford loans can be quite costly because interest accumulates during the period of study and so the capital sum for eventual repayment will also increase. 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 due will be $340 and this will be added to the loan capital. 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. Naturally this example is not completely accurate because interest is calculated and added monthly but it does nevertheless demonstrate the principles underlying this form of loan.
Depending on the sum of money that the student borrows every year and the time before repayment begins you can see that students can pay a relatively high price for delaying the repayment of this form of education loan.
In spite of the apparently high cost it ought to be remembered that a lot of the alternative methods for funding a college education can be considerably more costly and that a lot of students would not be able to afford to attend college without a Stafford loan.
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