What is a Guaranteed Student Loan?

You may still hear the term “guaranteed student loan.” For student currently considering taking out a student loan, the term is obsolete.

Before July, 2010, the Federal government disbursed loans two ways: it awarded them directly, and it worked through private lenders to award the loans. Loans directly from the government were called Direct Student Loans. Loans through lenders were Federal Family Education Loan Program (FFELP) loans.  Lenders who agreed to participate in FFELP received a subsidy for the loans they wrote and the government guaranteed that, if the borrower defaulted, the government would repay the loan. That is why they were called “guaranteed” student loans. Because private lenders knew their loans were guaranteed by the federal government, they were willing to offer loans on the same terms as the government, the same low rates, transparent contracts and flexible repayment terms offered by the federal government.

The Health Care and Reconciliation Act of 2010 ended FFELP, and the Federal government began to award all Federal loans directly. The “guaranteed student loan” became a thing of the past.

There are still several dozen loan guarantee agencies that insure loans made before July 1, 2010 against default.