Stafford Act

As part of President Lyndon B. Johnson's “Great Society” initiative, the U.S. Congress passed, and he signed into law, the Higher Education Act of 1965, authorizing federal student financial aid programs including the Educational Opportunity Grant Program and the Federal Insured Student Loan Program, better known as the Guaranteed Student Loan Program (GSL). The eligibility requirements and terms and conditions of the loans are set forth in Title IV of the act and its subsequent amendments. Since its inception, the GSL Program has provided low-cost loans allowing millions of students to receive a college education that they otherwise might not have been able to afford. In 1988, the GSL Program was renamed the Stafford Loan Program in honor of Republican Senator Robert T. Stafford of Vermont for his efforts to make higher education more accessible to students regardless of their socioeconomic status.

Stafford loans from the federal government are available to students who are engaged in undergraduate, graduate, or professional school studies and are enrolled on at least a half-time basis. Undergraduate students must be enrolled for six or more credit or semester hours. Eligible students may apply for Stafford loans by completing what is known as the Free Application for Federal Student Aid (FAFSA), which may be obtained at no charge from college or university financial aid offices or online at the FAFSA government organization Web site.

Financial aid is available to both dependent and independent undergraduate students whose dependency status is determined by information that [Page 430]they provide on their FAFSA forms. The limit on the amount of money students may borrow varies according to their grade level and dependency status. The law does not require credit checks when students apply for loans, because individuals are generally eligible to receive the loans regardless of their credit scores or history of financial problems. Stafford loans can be direct or indirect in nature. Direct loans are those that are administered by officials at institutions chosen by borrowers, while indirect loans are handled by staff members at lending organizations such as banks.

There are two types of Stafford loans, subsidized and unsubsidized. Both types of loans are guaranteed by the U.S. Department of Education. Subsidized loans are awarded on the basis of demonstrated financial need. If students qualify for a loan, the federal government pays the interest on (subsidizes) the loans while the students are attending school as well as for a six-month grace period thereafter. The grace period commences when students graduate, leave school, or are enrolled less than half time. Interest does not accrue on a loan until the repayment period begins. No payments are due on loans until six months after graduation or until borrowers become less-than-half-time students. For example, students who borrow $10,000 to help finance their education would owe $10,000 after graduation. At one time, subsidized loans were the only type of Stafford loans available.

Unsubsidized Stafford loans are now available to students regardless of their or their parents' incomes, and these loans are not awarded on the basis of financial need. For unsubsidized Stafford loans, the government does not pay the interest on the loans; students are responsible for the payment of interest that accrues on the loans from the time the money is disbursed to them until they repay their loan debt in full. For example, a student who borrowed $10,000 on entering school would, on graduation, owe $10,000 plus interest that accrued while he or she was in school. The interest would be computed and added to the total loan amount, and after the grace period expired, the student would have to begin making payments on the principal plus the accumulated interest. To continue with the same example, if the amount of interest accrued was $1,000, then the student would owe a total of $11,000. Students have the option of making payments while they are still in school to avoid the accrued interest.

...