Who are the players in the federal student loan industry?

Getting financial aid for college can be confusing. It seems like you’re always filling out some kind of form, waiting for some other form to be sent to you, or talking to someone at the financial aid office (or some other office). Here’s a quick rundown of who’s who and what’s what in the world of financial aid and the federal student loan industry.


Financial Aid Office
Usually a physical place at your school, the financial aid office is staffed with professionals who help new and returning students get money to pay for tuition bills and other expenses. These people really know their stuff and can help you find the right form to fill out and tell you what information needs to be on that form. They will also have information on scholarships, grants, and student loans, and the deadlines for each of these at your particular school. There’s typically a financial aid director, who is the head of the office, and financial aid counselors, who are full-time staff members available to help students. You may also find some part-time student workers in this office. If you are applying for financial aid for college, make sure you know where this office is located on campus.


Lender
A lender is a company that loans money to students and their parents to help pay for a college education. A lender may be your local bank that offers checking and savings accounts, along with education and consumer loans, or it may be a financial institution that deals strictly with education loans. Edamerica is an example of a lender that offers only education loans. When you apply for a federal student loan, you will be approved or denied by the lender based on the information required for the type of loan(s) you are requesting. Once approved, the lender will send your student loan proceeds to your school to cover the cost of your tuition bill and any other fees charged by the school. This transfer of money from the lender to the school is called a disbursement.


Servicer
A servicer is a company that the lender hires to take care of their student loan disbursements and borrower accounts. Think of the servicer as the maintenance crew for the lender. The servicer gathers the paperwork from borrowers, keeps track of the money going out as disbursements and coming in as payments, updates borrowers’ school attendance information, and performs customer service for borrowers. If you have questions about your student loan, you will probably end up speaking to the servicer, whose staff understands the student loan process from beginning to end and can help you with anything you might need in between. Edfinancial Services (the company providing this site) is a servicer for Edamerica as well as for several other student loan lenders.


Holder
A holder may not be a term you hear as often as lender or servicer, but the holder is still an important part of the student loan process. The holder is the company that owns the loan you must repay. Sometimes your lender and holder are the same company, but many times, the original lender will sell their student loans to holders to generate cash flow for new loans. Lenders and holders have a symbiotic relationship that helps keep funds available to student and parent borrowers.

A holder will buy student loans from a lender and pay cash for them. The holder then owns these loans and gets to keep the interest that they earn. The lender takes the cash from the sale and makes new student loans that can be sold to a holder later for more cash.

This is a common practice in the banking industry and doesn’t affect the terms of your loan, how much you owe, or your interest rate. If your student loan is sold, the companies buying and selling your loan are required by federal law to notify you that your loan changed hands and who purchased it.


Guarantor
The guarantor is the organization that insures, or “guarantees,” your federal student loan against default. This guarantee protects the lender in the event that a borrower fails to repay a loan. When a borrower defaults, the guarantor will purchase the defaulted loan from the lender. The lender uses the guarantor’s payment to continue making student loans, while the guarantor takes the responsibility of collecting payments from the defaulted borrower. Guarantors can offer borrowers rehabilitation programs for their defaulted student loans. For example, if a borrower in default makes a certain number of on-time payments to the guarantor, the guarantor can declare the loan “rehabilitated” and sell the loan back to the lender.


U.S. Department of Education
A part of the federal government, the U.S. Department of Education administers many aspects of education in the United States, from primary schools to colleges and universities. Duties include collecting data and statistics on the performance of schools in the United States, monitoring education funding, and ensuring access to education. Regarding student loans, the Department of Education oversees how federal dollars are used for financial aid and determines how much federal aid students can receive using the information on the FAFSA (Free Application for Federal Student Aid). The Department of Education reviews each student’s FAFSA and decides how much federal aid the student is eligible for, and how much the student and his or her family should contribute to the cost of education. This decision is communicated to the schools listed by the student on the FAFSA. The schools then create an award package for the student based on the information from the Department of Education.