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| Stafford Student Loans |
What is a Stafford Loan?
Over the years Stafford college loans have evolved with changing conditions and now there are two forms of the Loan – Subsidized and Unsubsidized.
Under a previous application operated under the Federal Family Education Loan Program, federal student loans were referred to as Stafford loans. Beginning July 1, 2010, all new federal student loans under the William D. Ford Federal Direct Loan Program were disbursed directly by the US Department of Education (Federal Direct Loans). Both Stafford and direct loans are compared to the same loans.
What is a Stafford Loan and How Does It Work?
Federally guaranteed student loans can be either subsidised (sponsored Stafford loans or direct subsidised loans) or unsubsidized (unsubsidized Stafford loans or unsubsidized direct subsidised loans) so that the federal government can pay the interest over time (unsubsidized Stafford loans or direct unsubsidized loans).
Direct supported loans are preferable for undergraduates who have demonstrated financial need, however any undergraduate or graduate student can take out direct unsubsidized loans, and financial need isn't usually a criterion. Students may borrow considerable amounts depending on their circumstances, but the maximum amounts that can be backed are $3,500 per year for freshmen, $4,500 per year for sophomores, $5,500 per year for juniors, and $5,500 per year for senior or fifth-year college students. The student's dependent status has an impact on the amount of money they can borrow.
Before applying for a loan, students must first be accepted into a university or college that accepts federal loans and complete the Free Application for Federal Student Aid (FAFSA). You must be enrolled in a programme provided by an approved faculty in order to use any federal loan to pay for your education. Check this page to see if the college or university you're considering is eligible for federal loans.
Stafford loans often have lower interest rates than personal loans, there is no credit check for maximum federal scholar loans, and repayment does not begin until after a student leaves university or goes below half-time.
Subsidized Loans
For subsidized loans the Federal Government accepts responsibility for paying any interest that accrues on a loan from the date of issue until the date on which the student has to start repaying the loan. Generally a student does not have to make repayments as long as he stays enrolled in a program of study that is considered to be a ‘half-time’ or greater program and for a period of six months following the end of his course. A student can however begin making payments sooner if he wants to do so.
Since interest is being subsidized, loans are generally only granted in cases of need and officials will examine both a student’s and the family’s income when deciding whether or not the student qualifies for a subsidized Stafford college 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 known as the Expected Family Contribution (EFC) calculated from the declared income.
Around two-thirds of all subsidized Stafford loans are granted to students with parents having an Adjusted Gross Income of less than $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 definition of ‘need’ becomes a bit blurred and slightly under one-tenth of loans are given to students with a combined family income of in excess of $100,000.
For students who do not qualify for a subsidized loan the majority will qualify for an unsubsidized Stafford loan. The major difference here is that the student must meet all loan interest payments, although once again payment will not generally start until six months after the end of the student’s program of study.
Unsubsidized Stafford loan
The workings of an unsubsidized Stafford loan means that a loan can be relatively costly as interest accumulates over the period of study and so the capital sum for eventual repayment will also increase. Let’s consider a very 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%. At the end of the year the interest due is $340 which will be added to the loan capital. During the following year the student will then accrue interest on the new capital sum of $5,340 at 6.8% which will amount to about $363 raising the total borrowed after two years to $5,703. Naturally this example is not completely accurate as interest is calculated and added monthly but it does nevertheless show the principles underlying this type of loan.
Dependent upon the sum of money that is borrowed 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 the apparently high cost it has to be remembered that many of the alternative methods of meeting the cost of a college education are considerably more costly and that a lot of students would not be able to afford to attend college without Stafford college loan money.
Learn more about The Federal Family Education Loan Program and Stafford Loans