What is a federally guaranteed student loan?

What is a federally guaranteed student loan?

What is a federally guaranteed student loan?

Federally guaranteed student loans were former financing options for American college students prior to . Much like Federal Housing Administration (FHA) mortgage loans, these were loans offered by private lenders but insured by the federal government – meaning the government would step in and pay off the balance if the student defaulted on their loan.

Guaranteed student loans were officially a part of the Federal Family Education Loans program (FFEL), which was discontinued in 2010. It was replaced by a new option – direct federal student loans – immediately after. Direct federal loans are still available.

What is a federally guaranteed student loan?

Loans issued under the FFEL program were available through private lenders, but “guaranteed” by the federal government. In the event a student failed to repay their FFEL loan, the government would purchase the loan for the lender for 97 percent of its principal balance and then assume all payment collection and administrative duties on the loan.

The federal government also issued subsidies to help lenders issue FFEL loans. Essentially, these helped reduce the risk that private lenders took when providing low-cost student loans.

FFEL options included the Stafford Loan, the Parent Loan for Undergraduate Students loan (PLUS) and consolidation loans. Many of these loans are still available; they’re just no longer issued by private lenders. Instead, they’re funded and disbursed directly by the U.S. Department of Education.

What happened to federally guaranteed student loans?

Congress officially ended the FFEL program on as part of the Student Aid and Fiscal Responsibility Act. Though no new FFEL loans were issued past June 30 of that year, millions of former university students are still repaying these debts to this day.

According to the National Student Loan Data System, about 7 million Americans are in the repayment phase of their former FFEL loans. Altogether, their balances add up to more than $154 billion.

Borrowers who still have FFEL loans are expected to repay their lenders, as they are with any other financing product. However, if that student defaults on their loan, the government is still on the hook for much of the lender’s loss. They would also take responsibility for collecting on the loan balance.

What student loan options are currently available?

Fortunately, the end of the FFEL program didn’t eliminate federal student loan options altogether. There are still several loans offered by the federal government, as well as various grants, too.

  • Direct Subsidized Loans: These are federal loans that are based on the student’s financial need. Students pay no interest on their balances while in school and have a six-month grace period on payments after graduating.
  • Direct Unsubsidized Loans (Stafford Loans): These loans are not based on financial need and the amount that can be borrowed is determined by the student’s chosen college or university. Students are responsible for all interest accrued on these loans, including during school and in the grace period following graduation.
  • Federal Direct PLUS Loans: These federal loans are designed for graduate students and for the parents of undergraduate students. They require a credit check on the applicant.
  • Federal Direct Consolidation Loans: Consolidation loans can be used to roll all a student’s federal loans into a single one. This can help streamline payment and potentially lower the amount of interest paid over time.

To see what federal student loans you qualify for, you’ll need to fill out the Free Application for Federal Student Aid, or FAFSA. This application will also determine your eligibility for federal grants, too.

Federal grants include the Pell Grant, Federal Supplemental Educational Opportunity Grants, Iraq and Afghanistan Service Grants, and Teacher Education Assistance for College and Higher Education grants payday loans tennessee. Grants are awarded based on financial need.

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