A guaranteed student loan is a loan guaranteed by the U.S. federal government provided through a private lending institution. For a student with extreme financial needs, a guaranteed student loan is one of the better loans to help students fund a students' college education. The government is responsible for paying the interest and paying the lenders to manage the loan. The subsidized Stafford loan used to be called the Guaranteed Student Loan. However, because the same description applies to any state or federal loan that is guaranteed against default, the name was changed.
The guaranteed loan is interest free and based on a borrower's financial need. In order to apply, a student must submit a FAFSA to find out their eligibility. Through completing the FAFSA, students must show that are financially needy and, based on their low Expected Family Contribution, prove they lack adequate financial backing. Before a private lender or lending institution can agree to a guaranteed loan, both parties must accept loan responsibility, dispersing subsidy payments to the loaner who accepts no risk or responsibility in cause of loan default. It is the federal government's responsibility to make sure that the borrower pays the loan back, including interest and lender fees. The federal government accepts the responsibility for the guaranteed student loans if the borrower defaults.
Guaranteed student loans do not require a student to pay interest on the loan and require students to be enrolled in a college program half or full time.
Guarantee agencies insure student loans against default. The 1 percent default fee (previously "guarantee fee") that is collected from each disbursement on a federal education loan is paid to the designated guarantee agency to cover the costs of insuring the loan. If the borrower defaults, dies, or in other extenuating circumstances, the guarantee agency reimburses the lender for the balance remaining on the loan.
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