Student Loan Guarantors
By: Alan Collinge
December 9th, 2006
Im having trouble getting my head around what a student loan guarantor is. Can you help?
Federally guaranteed student loans are confusing. First there is the university, who prepares financial aid packages for the students, comprising a mysterious mix of grants, loans, scholarships, and the like. By the time most students get through digesting their aid packages, their minds are usually sufficiently numbed to a state where they will sign anything.
Then there is the lender, like Sallie Mae or Nelnet. They magically appear as the students head is still a bit swimmy, and conveniently produce loan documents for the student to sign. Dont have a pen? Use theirs! (pen thrust into students face).
This is where the student loan guarantor creeps in. Snuck into the loan documents is a guarantee fee, usually 1% of the total balance. Most presume that this fee pays the guarantor (these loans are federally guaranteed) to do what a guarantor does: Guarantee the loan against default.
Ok. This sounds reasonable- Kind of nickel and dimey- but such is life. So, the guarantor is part of the federal government that guarantees the loan. Right?
Wrong. Guarantors are not part of the federal government. They are usually non-profit (and I use that term extremely loosely here) corporations that have ambiguous (at best) mission statements. Heres one for instance. This is a non-profit guarantor called Edfund, out of California:
EDFUND is dedicated to maximizing
benefits to borrowers by being the premier
service provider in the student loan industry.
Heres another. This is the Northwest Education Loan Association (NELA):
Northwest Education Loan Association (NELA)is a not-for-profit guaranty agency that works in partnership with schools, banks and other lending institutions to help students continue their education
Ok now Im really confused so guarantors maximize benefits to borrowers, and help students continue their education. How do they achieve this? Do they actually guarantee the loans? Is that 1% fee for guaranteeing the loans, or helping students to maximize benefits (whatever that means)?
Well, lets look at what guarantors actually do: They take defaulted loans, increase the balance by more than 20%, and begin demanding payment from the borrowers. They garnish wages, income tax returns, and can (and do) increase the interest on the loan. They offer loan rehabilitation programs that force a debtor to agree to the higher amount being demanded of them, and after 12 months of repayments on these higher rates, the loan can be sold (with additional fees, of course) to a new lender (often the same lender as before). The 1% fee is just the price of admission, if you will, that the borrower pays to allow the guarantor to perform these actions to their loan when they run into financial trouble.
Are you purposely trying to confuse me?! I thought they guaranteed the loan against default. All Im hearing is that they take a default loan, pile more debt on top of it, and strongarm the borrower into paying the vastly inflated amount! How the hell does that "maximize benefits", and "help students"? And what does that have to do with guaranteeing a loan? And quit stonewalling me- Do they actually guarantee the freaking loan or not?!
While technically, the guarantor does pay the lender the book value of the defaulted loan, the true guarantor of the loan- the entity that ultimately pays for the loan if the borrower is unable to- is the federal government.
What I think Im hearing is that guarantors are nothing more than a middleman, and that all they do is hurt-rather than help- students by adding huge costs to the loan, and further burying the borrower in debt who couldnt afford the loan in the first place, and that ultimately, the federal government is the true guarantor. If this is true, than why the hell do they even exist? Did Congress really make this happen?!
Thats what I said.