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An Introduction To The Basics
Of The Stafford Student Loan
By Don Saunders
In 1965 Congress created the Federal Family
Education Loan Program (FFELP) in order to provide
financial aid to students. One element of this loans
program is Stafford loans which were originally
intended only to help those students in real
financial need but which now comprise more than
ninety percent of all Federal student loans.
Over time Stafford loans have altered to take
account of changing conditions and now there are two
forms of the loan - subsidized and unsubsidized
Stafford loans.
In the case of subsidized loans the Federal
Government assumes responsibility for the payment of
any interest that accrues on a loan from the date on
which the loan is issued until the student has to
start repaying the loan. Generally a student will
not have to make repayments while he is enrolled on
a program of study that is considered to be a
'half-time' or greater program and for a period of
six months after the conclusion of his course. A
student can however begin to make payments sooner if
he wants to do so.
Because interest is subsidized, these loans are
usually granted only on the basis of need and
officials will take into account both a student's
and his family's income when deciding whether or not
a student qualifies for a subsidized Stafford loan.
Students are required to complete a Free Application
for Federal Student Aid application that includes
income details and the student will then be assigned
a number known as the Expected Family Contribution (EFC)
calculated from the declared income.
Around two-thirds of subsidized Stafford loans are
allocated to students with parents who have an
Adjusted Gross Income of less than $50,000 per year.
A further one-quarter are awarded to families in the
$50-100,000 per year range. After this the meaning
of 'need' becomes somewhat fuzzy and slightly under
one-tenth of loans are given to students with a
combined family income of over $100,000.
In the case of those students who do not qualify for
a subsidized loan most will qualify for an
unsubsidized Stafford loan. The major difference
here is that students must meet the interest
payments on the loan, although again payment will
not usually start until six months after the end of
the student's program of study.
An unsubsidized Stafford loan can be reasonably
costly as interest builds during the period of study
and so the capital sum for eventual repayment will
also grow. Let us consider a very simplified
example.
Let us say that a student borrows $5,000 in his
first year of study at an interest rate of 6.8%.
After one year the interest due is $340 and this
will be added to the loan capital. During the second
year the student will accrue interest on $5,340 at
6.8% and this will come to approximately $363
raising the total debt after two years to $5,703.
This example is not wholly accurate as interest is
in fact calculated and added monthly but it does
nevertheless demonstrate the principles of this form
of loan.
Dependent upon the sum of money that is borrowed
each year and the length of time before repayment
begins we can see that students can pay a reasonably
high price for the benefit of delaying the repayment
of a Stafford loan.
In spite of this seemingly high cost it should be
remembered that a lot of the alternative methods of
meeting the cost of a college education are much
more costly and that many students would simply not
be able to afford to attend college without a
Stafford loan.
TheStudentLoansCenter.com provides information on
Stafford college loan money and
student loans backed by the federal government.
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