Guaranteed Student Loans
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Guaranteed student loans can mean a couple of different things in the realm of financial aid. The current Subsidized Federal Stafford Loan was once simply known as the Guaranteed Student Loan. The term can also apply to any state or federal loan that is guaranteed against default by the lender. Guaranteed loans have been used for student subsidies for nearly 50 years.
What is a Guaranteed Student Loan?
A guaranteed student loan is extended from a lending institution under the guarantees of the Federal government. The Federal government takes on the responsibility for paying the interest on the loan as well as paying the lenders to manage the loan. The Federal government also assumes the responsibility for the loan if the student defaults, eliminating almost any degree of risk for the lender.
Need-Based Subsidized Loans
Because subsidized Stafford Loans are need-based, a bank or educational lending institution cannot require credit checks like they typically do with their own brand of loans. This is why private lenders can actually participate in the Stafford loan program, they use their money for the loan, receive subsidy payments from the Federal government, and they assume no risk.
In the case of a need-based loan, a family must prove financial need for a subsidized student loan. If approved, a subsidized Stafford Loan means that the Federal government pays all the interest on the loan until the loan becomes due, usually six months after graduation.
Unsubsidized Loans
Unsubsidized Stafford Loans are not guaranteed, but there are exponentially fewer of them. The borrower is responsible for paying all the interest on the loan as soon as it becomes payable as well as the complete balance of the loan should it fall into default.
Besides the Federal government, other financial services may offer Federal Stafford loans to students. The Federal government is the lending body, but the participating organization assumes responsibility for the guaranteed loan in the case of default and payment of any interest. For example, some state governments will guarantee the loan instead of the Federal government.
Federal Costs of the Guaranteed Student Loan Program
There have been many critics of the Guaranteed Student Loan program. The Federal government also offers direct loans that many say have been much more effective than the budget-draining guaranteed loans.
