Background
As you might know, I spent many years in Financial Aid Offices before moving to the “other” side. While in the Financial Aid Office, my primary responsibility was loans—for the first few years at the undergraduate level, and then my final five years were at a law school. As you can imagine, after 8-9 years of working with student loans from the school perspective, I felt like I had a pretty good handle on the way loans worked. I understood the functions of the lender, the guarantor and the servicer. I had helped to create an automated process that worked beautifully at my school. I could compare loan terms pretty well and felt that I was recommending loans that were the best value for my students. I knew that for the lenders on my preferred lender list, loans for lender X were sent to the lender, while loans for lender Y were sent to the guarantor, and loans for lender Z were sent to the servicer—but I never knew WHY! I just figured that this was the way it had to be… little did I know!!

Once I moved on to the “other” side (first a software company, then to a guarantee agency), I began hearing terms such as “lender flow”, “guarantor flow”, and “full service” being used as if they were common everyday words. I knew they must have to do with loans, but I had no idea what they meant. This is when I began to realize that I may not know as much about the loan process as I had thought! Well… kind of… Let me explain.

What I’ve come to find out is that I did actually ‘know’ what these terms meant; I just didn’t “KNOW” what they meant. I had a general understanding of the processes because I actually used them everyday in the Financial Aid Office; I just didn’t realize that there was a name for these processes and that there was actually a method behind all of the madness. Once I figured it all out, I realized that I would have done things much differently had I known then what I know now. I hope this article will help some of you to better understand why you are doing some of the things that you are doing, and that it gives you insight into ways that you could potentially streamline your loan processing.

Definitions
Lender – A national or state chartered bank, mutual savings bank, savings and loan association, stock savings bank, or credit union. They provide the loan funds.

Guarantor – A state or private nonprofit organization that has an agreement with the U.S. Secretary of Education to administer a loan guarantee program under the Higher Education Act. They basically insure the loans.

Servicer – An entity that enters into a contract with a program participant to administer any aspect of its participation in a Title IV program.

Process Flow – The process by which a loan goes from certification to disbursement; the path a loan follows from beginning to end.

Lender Flow – Loan data is first sent to the lender. The lender will obtain/confirm a valid Master Promissory Note (MPN) is on file, obtain a guarantee from the guarantor, and will disburse the funds to the school.

Guarantor Flow - Loan data is first sent to the guarantor. The guarantor will obtain / confirm a valid MPN is on file and guarantee the loans and disburse the funds to the school, obtaining those funds from the lender(s).

Servicer Flow – Loan data is first sent to the servicer. The servicer will obtain / confirm a valid MPN, obtain, obtain the guarantee from the guarantor, obtain the funds from the lender, and disburse the funds to the school.

Full Service – You are considered to be ‘full service’ with whichever entity is obtaining the MPN, school certification, and disbursing funds. So, referring to the flows above, if you are using the ‘guarantor flow’, then you are ‘full service’ with the guarantee agency.

Lender Code – Identifies who the players are (lender, guarantor, servicer) and the agreed upon flow.

Discussion
After reviewing these flows, think about how you currently process. Are you using one or more of these flows? Know that many of your partners can accommodate each of these processes. They may prefer one over the other, but most can do all. So, think about why you process the way you do. Is it because “that’s the way it’s always been done”, or “that’s how they told me to do it”? If so, know that it doesn’t necessarily have to be this way. You can decide which process works best in your office and make changes accordingly. Work with your partners to create the process that works best for your school. Always keep in mind though, that some of your smaller partners may not be able to accommodate every possible process. If they can’t do your preferred process, you’ll need to make the decision as to whether you are willing to keep that partnership and process differently with them, or whether the streamlined process is more important to you. You, the school, are the only one who can make this decision.

Conclusion
The above information is very basic. Many additional options in loan processing can complicate things. Features such as ‘borrower initiated’ and ‘school initiated’ flows; e-sign vs. wet signature; your financial aid management system (i.e. Powerfaids, PeopleSoft, etc.); your loan processing system (i.e. ELM, OpenNet, ScholarNet, etc.) all create added layers of complexity to loan processing. It is important to understand the basics (provided in this article) first. Once you’re comfortable with the basics, it will make it much easier for you to determine a process that works best for your school.