Many former students have federally guaranteed student loans. These loans are different from private student loans that are not guaranteed by the government, and from loans issued directly to the student by the federal government (direct loans). As of June 30, 2010, Congress stopped the guaranteed student loan program for newly issued loans. But many people are still paying on their federally guaranteed student loans that were issued prior to June 30, 2010—so they'll be kicking around for many years to come.
Read on to learn what a federally guaranteed student loan is, how to determine if your loan is a federally guaranteed student loan, and key differences between federal guaranteed and federal direct loans.
Under the guaranteed student loan program, private lenders—including Sallie Mae and commercial banks—issued student loans that were guaranteed by the federal government. Guaranteed loans are also called Federal Family Education Loans (FFEL). Here's how the "guarantee" works:
If a borrower defaults on a guaranteed loan, the federal government pays the bank and takes over the loan. The federal government pays approximately 97% of the principal balance to the lender. At that point the federal government owns the loan and the right to collect payments on the loan.
Types of FFEL loans include Stafford, PLUS (Parent Loan for Undergraduate Students), and Consolidation loans.
When the federal government takes over a defaulted FFEL loan, it uses a “guarantee agency” to do the work of servicing the loan. Guaranty agencies are nonprofit groups that contract with the federal government. They are essentially middlemen between the private lender and the federal government. The guarantee agency will pay the bank for the defaulted loan, and the federal government then reimburses the guarantee agency. The guarantee agency then attempts to collect on the loan.
There are many existing guarantee agencies, all assigned to different states. You can find a list of the guarantee agencies and their state assignments at www.finaid.org.
Responding to arguments that the FFEL program was more costly to the government than direct loans, Congress ended the FFEL program effective June 30, 2010.
Although schools no longer offer guaranteed student loans, the guaranteed student loan system will be in place for many years to come. That's because millions of borrowers still owe money on FFEL guaranteed loans. The guarantee agencies will continue to pay banks for defaulted FFEL loans and pursue collection on those loans until the last FFEL loan is paid off.
Prior to June 30, 2010, lenders issued federal student loans either as guaranteed student loans or as “direct” student loans. Direct loans are issued directly by the federal government. Whether you received guaranteed or direct loans depended on which loan program your school signed up for.
After June 30, 2010, you can only get a federal student loan under the direct student loan program. A direct loan is made directly from the federal government to students. The federal government contracts with loan servicers to handle day-to-day loan management.
The most important difference between guaranteed and direct loans is the availability of repayment programs. The federal government offers several repayment plans for low-income borrowers—like the Income Based Repayment Plan (IBR), Income Sensitive Repayment Plan, Income Contingent Repayment Plan, Pay As You Earn (PAYE), and the Pay As You Earn Repayment Plan (REPAYE). (To get details of these repayment plans, see Student Loan Repayment Plans or visit the Department of Education’s website at studentaid.ed.gov.)
Some of these plans are available to certain FFEL borrowers. Generally the repayment plan options are more generous for direct loans than for FFEL loans.
To determine whether you have FFEL guaranteed or direct loans, access the National Student Loan Data System at www.nslds.ed.gov.