Guaranteed Student Loans
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Guaranteed student loans can mean a couple of different things in the realm of financial aid. For example:
- The current Subsidized Federal Stafford Loan was once simply known as the Guaranteed Student Loan.
- The term can also apply to any state-based student loan or federal student 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 financial guarantees, or insurance of the Federal government. Guaranteed loans are most associated with the Federal Family Education Loan Program (FFELP), which includes the Stafford Loans and the PLUS Loans for parents and graduate students.
Federal Guaranteed Loans
The Federal government is most well recognized as the chief guarantor for federal student loans, particularly the FFELP program in which dozens of student loan lenders participate. But the government also acts as lender for its own Direct Federal Loan Program. The FFEL program was first started in 1965 with the introduction of the Higher Education Act of 1965. With the participation of hundreds of FFEL lenders the federal student loans were made much more accessible. The FFELP originates three times the number of loans originated through the federal Direct Loan program.
State Guaranty Agencies
State-based agencies may also guarantee federal loans. For example, the Oklahoma Guaranteed Student Loan Program offers financial insurance and incentive for lenders that extend the Federal Family Education Loan Program (FFELP) to Oklahoma student residents. In this case student residents have the privilege of applying for FFEL loans directly through the state.
Tip: Some state guaranty agencies are able to offer better deals than you’d find through any lender. So don’t overlook yourstate student loan deals.
How Does Loan Guarantee Work?
The federal government and certain state agencies actually pay subsidies to lenders. This over the years has become a significant bone of contention when any discussion of the cost of college and student debt arises. The purpose of lender subsidies:
- Insure lenders have funds to cover borrowers that default on their loans.
- Provide income to lenders for their participation in the FFEL program.
Lenders Paid to Participate
Imagine how much money a private lender stands to lose when just one student loan borrower defaults on a student loan. The lender stands to lose many thousands of dollars. Multiply this by many borrowers. Lenders would go out of business; it would not be feasible for them to extend the FFELP loans to students. Instead government sources offer them financial insurance so they assume no risk.
When the College Cost Reduction Act of 2007 was signed into law it included reductions in the lender subsidies, which may lawmakers felt had spun out of control. This measure is a direct blow to lender profiteering.
The big benefit of the guaranteed student loan program, or the FFELP, is that you, the student, have a much wider array of lenders from which to choose for your federal student loans.
Popular Guaranteed Student Loans
The most popular guaranteed student loans by far are the Stafford Loans.
Subsidized Stafford Loans are need-based. The federal government pays the interest on these low-income loans. One of the best features is that they are no credit check loans—your lender cannot ask you to go through a credit check. But this puts lenders at financial risk. They are basically advancing money to borrowers with poor credit who risk defaulting on student loans. Lenders use their money to fund your subsidized Stafford Loans and for this service they are given subsidy payments from the federal government in exchange for the risk they assume.
Unsubsidized Stafford Loans do not offer interest subsidies to borrowers; they are not exclusive to low income borrowers. The borrower is responsible for paying all the interest on the loan as soon as the loan is disbursed.
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.
