An Examination Of The Principles Of The Government Stafford Loans Scheme

In 1965 the US Congress set up the Federal Family Education Loan Program to give financial assistance to students. One part of this loans program is Stafford loans which were initially intended only to help students in real financial need but which nowadays represent in excess of ninety percent of all Federal Government education loans.

Over the years Stafford loans have evolved with changing conditions and today there are two forms of the loan - subsidized and unsubsidized.

When it comes to subsidized loans the Federal Government takes responsibility for paying any interest accruing on a loan from the date of issue until the student is required to begin repaying the loan. In normal circumstances a student will 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 of study and for a period of up to six months following the end of his course. A student can however begin making payments at an earlier point if he wants to do so.

As the interest on the loan is being subsidized, loans are normally granted only on the basis of need and aid officials will take into account both a student's and the family's income when determining whether a student qualifies for a subsidized Stafford loan. Students have to fill out a Free Application for Federal Student Aid (FAFSA) application form which includes income details and each student is then given a number called the Expected Family Contribution calculated from the income figures provided.

Around two-thirds of subsidized Stafford loans are granted to students whose parents have an Adjusted Gross Income of less than $50,000 per year. A further one-quarter of subsidized loans are granted to families in the $50-100,000 per year range. At this point however the definition of 'need' gets somewhat fuzzy and slightly less than one-tenth of subsidized loans are allocated to students with a combined family income of more than $100,000.

For students who do not qualify for a subsidized loan the majority will qualify for an unsubsidized Stafford loan. Here the main difference is that students will be required to meet all interest payments on the loan, though once again payment do not normally begin until six months after the end of the student's program of study.

Unsubsidized Stafford loans can be very expensive as the interest accumulates during the period of study and so the capital sum on which repayment will eventually need to be made will also grow. Let's look at an extremely 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%. After one year the interest due is $340 which will be added to the loan. In the next year the student will then accrue interest on $5,340 at 6.8% which will amount to roughly $363 raising the total debt after two years to $5,703. This example is not entirely accurate as interest is in fact calculated and added monthly but it does nevertheless demonstrate the principles of this type of loan.

Depending on the amount of money which is borrowed each year and the time before repayment begins it can be seen that a student can pay a relatively high price for delaying the repayment of this form of education loan.

Despite the seemingly high cost it ought to be remembered that a lot of the alternative methods of meeting the cost of a college education can be much more expensive and that many students could not afford to attend college without the Stafford loans scheme.

TheStudentLoansCenter.com provides information on Stafford college loans and Federal and State student loans and grants