Should I Accept the Stafford Loan? Apr 10 '01    Write an essay on this topic. Tweet The Bottom Line Money is available to help with college tuition, but make sure you don't overextend yourself. Your teenager has been accepted to college and you just gave the school the deposit to hold the spot for the upcoming fall semester. You submitted the FAFSA application and got an answer as to what your Estimated Family Contribution (EFC) will be but had no idea what it meant. Well rest assured that you are not alone, but your college financial aid office knows exactly what it means. Figuring our Financial Aid can be very difficult and a nerve wracking experience. The best source of information is by far you Financial Aid office. One of the items you will most definitely see on your Award Letter will be a Stafford Loan. You should be asking yourself what is a Stafford Loan and should I accept it? My advice is…it depends but most probably yes. Why do I say probably? To put it simply, there are two types of Stafford Loans. One is a Subsidized Loan , and the other is an Unsubsidized Loan. The amount of the loan is set depending on the year of school the student is in. The first year the amount is $2650, the second year $3500 and the third and fourth year the amount is set at $5500 per year. You are NOT obligated to accept an amount in a future year nor are you excluded from a future year if you do not accept a loan in a previous year. What is the difference between the Subsidized and Unsubsidized Stafford Loans? Simply put they depend on the income that was reported on the FAFSA form. If the student is a dependent then it is the combined income of both parents AND the student. If the student is not a dependent then it is based solely on the students’ income. For the rest of this review lets assume the student IS a dependent. The Financial Aid office will tell you on the awards letter which one you qualified for. In both cases below I am using the first year loan of $2650 only. Lets talk about the Unsubsidized loan first as this one takes some thought as to whether or not to accept it. This loan accrues interest from the first day that the money is sent to the school. The rate is set by the government and can change once a year. The interest rate can never exceed 7% during the life of the loan. The payments are deferred until the student leaves school (i.e. graduation, dropping out). If you need the money for school then you should accept this loan. If not, don’t! The interest can add up very quickly. After 4 years the interest can be as high as $742 on the $2650. And that is on the first year’s loan only. The interest may be deducted on the students’ income tax return when repayments begin. (Check with your tax advisor). You have to decide if this is the way to go. However, on the other hand, the Subsidized loan is much easier to figure out. On this loan all principle and interest payments are deferred until the student leaves school. This one is easier to figure out. There is NO interest on the loan while the student is attending school. Let’s look at what you should do. Even if you have the $2650 available now, there is no advantage to giving the money to the school now. A better idea would be to put the money in a Certificate of Deposit (CD) and earn the interest on it. Even at the current low interest rates this should be done. Using an example of 4.5% for 4 years that adds up to just over $500 over the four years. (Including compounding of the interest). In four years, when payments are to begin you can pay off the entire amount interest free! At that time close out the CD, pay the $2650 and you are ahead by the $500! And this is based on the first year loan only. In both cases the loans are issued to the student and it will be their responsibility to pay it back. There are no credit checks and the only 2 ways a loan is rejected is if the student or you is in default on any previous student loan or the Male student has not registered with the Selective Service System. No matter what you decide remember to borrow wisely as these are loans that must be paid back.

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