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What is a Stafford Loan?

Paying for further education costs for your child can appear to be daunting at first, but take comfort in the fact that there are increasing levels of financial aid available. In 2004, over $122 billion of student aid has been granted to try and ensure that everyone has equal access to further education. If you compare this to your families Expected Financial Contribution (EFC), you begin to realize that your EFC actually only accounts for a fraction of the cost! This financial aid generally comes in the form of a grant or a loan such as a Stafford loan.

Let’s focus on what a Stafford loan is and the benefits of taking out such a student loan.

What is a Stafford student loan?

A Stafford loan is a federal loan for students. At present, Stafford loans actually account for 37% of education loans provided for students.

There are two types of Stafford loan available:

Subsidized Stafford Loan

To receive a subsidized federal Stafford loan, you have to demonstrate financial need. This means that the loan is awarded when the family has demonstrated that they will not be able to pay for the full cost of their child’s education. Your award letter will detail what types of loans and the amounts you qualify for.

The aid office will ask you to choose from a list of recommended lenders for a Stafford loan and the loan will be sent directly to your college to pay your fees and tuition costs.

What are the benefits of subsidized Stafford loan?

  • The federal government will pay the interest on the Stafford loan whilst you are in college.
  • They will also subsidize the interest after graduation.
  • You will not have to make any capital repayments whilst you are attending college. The funds must be repaid in full after you graduate but you do not have to worry about making any financial contribution whist you are attending college
  • The interest rate on a subsidized Stafford loan is much lower than you would obtain on a private college loan.

Unsubsidized Stafford Loan

These loans are not subsidized by the federal government as they are not based on need. Families turn to these types of Stafford loans when they feel that they cannot afford their EFC, either from their income or savings.

What are the benefits of an unsubsidized Stafford loan?

The main benefit here is that this Stafford loan is still cheaper than a private loan. This is because the interest rates are guaranteed by the federal government and are kept below market levels. The main differences to a subsidized Stafford loan are:

  • Interest rates will be slightly higher.
  • The federal government will not pay the interest on the Stafford loan whilst your child is in college. You can choose to capitalize these interest payments so you do not have to pay anything until after graduation, but you will end up owing the lender more money.
  • Some Stafford loan providers may require you to make capital repayments on the loan whilst studying.

The College Board – Trends In Student Aid 2004

The College Board – Trends In Student Aid 2004