A guarantee agency insures student loans in coordination with the federal government. In the event that a borrower defaults on a student loan, the guarantee agency will buy the loan, allowing the lender to recover its money.
Student loans are considered extremely low risk because they are guaranteed by the federal government and charge a guarantee or default fee of 1 percent. This fee is collected every time a student receives money through a student loan. It is used to pay a guarantee agency to cover the insurance on the loan. Not all guarantee agencies collect this fee because many have built a large enough reserve that they may waive this fee.
A guarantee agency purchases a student loan from a lender only if the student defaults on the loan. This guarantees the lender does not lose money from the loan. A guarantee agency also purchases student loans if the borrower dies or becomes permanently disabled.
If a loan is in default, a guarantee agency has the right to have the borrower’s wages garnished. They may also ask for a federal offset of the borrower’s income tax return. The agency may also take legal action against a borrower in order to recover some or all of the money owed.
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