Where Does Funding for Federal Student Loans Come From?

If you have a federal student loan providing financial aid for college, you receive funds from one of two sources, the government itself or private institutions that originate loans guaranteed by the government.

Borrowing Federal Dollars

When you apply for a federal student loan, as opposed to federal grants, which do not have to be repaid, you will choose from the Direct Loan program or the Federal Family Education Loan program. Both programs offer loans for students, loans for parents of qualifying, dependent students and consolidation loans.

In the Direct Loan program, the money being loaned is appropriated by Congress and comes directly from the Department of Education. The loans are administered by school financial aid offices.

Government-Backed Loans

If your federal student loan comes through the Federal Family Education Loan program, you are dealing with institutions offering loans guaranteed by the government. If you default, the government makes good. However, you still are responsible unless the loan is repaid, forgiven or other arrangements are made.

In both cases, you are liable to repay your loan. Also, in both cases, you apply for the loan using the Free Application for Federal Student Aid, or FAFSA, online system.

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