Private lenders fund the loan.
The federal government guarantees the loan against default, which allows lenders to offer loans at very attractive interest rates. These loans are sometimes referred to as Federal government guaranteed student loans. A Stafford Loan is a government-guaranteed loan available to students. With a subsidized Stafford, the government pays the interest while you're in school. With an unsubsidized Stafford, you are responsible for the interest while you are in school.