The “FFEL” – Federal Family Education Loan Program – is federal program under which private lenders used their own funds to make federal student loans to borrowers to pay for secondary education (college). These Loans were guaranteed by guaranty agencies that insured these funds, which were, in turn, reinsured by the federal government.
The FFEL loan program was discontinued as of July 1, 2010 by enactment of the Health Care and Education Reconciliation Act of 2010. No new FFEL Program loans have been made since.
“Guarantors” or “guarantee agencies” are not-for-profit companies or state agencies that insure FFEL student loans against default.
Guarantee agencies act as middlemen between the federal government, private FFEL lenders and borrowers. The guarantee agencies charge a 1% default fee (previously called a “guarantee fee”), collected from each disbursement on a federal education loan, to cover the costs of insuring the loan. If the borrower defaults, dies or becomes totally and permanently disabled, the guarantee agency takes ownership of the loan and reimburses the lender for the balance remaining on the loan.
If a borrower defaults on a FFEL loan, the private lender can file a default claim with the guaranty agency to purchase the remainder of the loan. The federal government will reimburse the guarantee agency up to 95 percent of the purchase amount. However, before the federal government will purchase the loan, it must determine that the guaranty agency did everything it could to prevent default. For this reason, guarantee agencies are incentivized to work with borrowers to avoid default.