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Student Loans - Where the Money Comes From

Updated on June 13, 2011
This is one view of the University of Chicago
This is one view of the University of Chicago

Who exactly funds the Student Loans out there?

Who are the major "players" when it comes to loaning money to students in the USA? Lets start with the United States Government.

The US Government both creates and monitors the legislation having to do with federal student loans. It also appropriates funds funds for those student loans as well as loan forgiveness programs. The government basically borrows funds from the US treasury to lend directly to the students through the Direct Loan Program.

Another major player is the US Department of Education, in particular. This entity administers both student loans and financial aid programs, which include the FAFSA and SAR, as well as reimburses the guarantors who have paid back defaulted loans. The US Department of Education makes Special Allowance Payments, or SAPs, to lenders. They sometimes also take on the responsibility of collecting on a defaulted loan.

For Profit, and Non Profit Lenders

Both For Profit and Non Profit lenders help to supply the funds for many student loans under the FFEL program, which is the Federal Family Education Loan program. The funds for the loans in these cases might come from investors, financial institutions and banks. Sometimes they come from the issuing of bonds. Lenders are protected from risk by the United States Government which in turn encourages them to put into the programs. They might service these loans directly or contract them with loan servicing companies which would collect payments and work with the students doing the borrowing.

Investors and Guarantors

The investors include millions of people that place their savings into banks and financial institutions. The banks loan out this money and also bring in a steady rate of return. They rely on the interest paid by the student's funds to grow their own retirement funds, their own children's college funds, and pension funds.

Guarantors predate the Federal Family Education Loan program (FFEL). They act as student loan insurers and administrators. There are a few dozen active guaranty agencies of different types out there. They reimburse private lenders for losses, like when student loans go into default. They also act as a collection "agency" for the federal government, and will assist borrowers who are having a hard time paying their loans. Guarantors will even act as lenders themselves, on occasion. There are some guaranty agencies out there that will administer state level loans and financial aid programs.


Do you think Student Loans are a good idea, when a student is out of options financially to pay for college?

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    • oceansnsunsets profile image
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      Paula 6 years ago from The Midwest, USA

      Dallas, so glad you wanted to share this with your son. Thank you very much!

    • dallas93444 profile image

      Dallas W Thompson 6 years ago from Bakersfield, CA

      Enjoyed and shared with my son. Flag up and useful!

    • oceansnsunsets profile image
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      Paula 6 years ago from The Midwest, USA

      Thank you, Glemoh! Glad you stopped by.

    • Glemoh101 profile image

      Glemoh101 6 years ago

      Great information , thank you.