How are student loans disbursed?


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A college education almost always costs more than families initially think it will, when everything is accounted for, so most students take out loans. The loan money is sent to the attending college, placed in the student’s account and applied to various costs.

Fortunately, there are plenty of options available. But students are often left with questions like How are federal student loans disbursed? How are private student loans disbursed?

Stay tuned for clarification and guidance on federal and private student loans.

Related: A guide to private student loans

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The Lowdown on Student Loans

Student loans are designed to help college students absorb the many costs of postsecondary education.

The average price of tuition and fees for the 2020-21 school year was $10,600 for an in-state student at a public college and nearly $37,700 for a private college student. The total annual cost of attendance ranged from nearly $27,000 at public colleges (in-state rate) to $55,000 at private colleges on average.

So borrowing becomes the normal route. Student loans are most often used to cover:

  • Tuition and fees
  • Housing
  • Meals
  • Transportation
  • Books and supplies
  • Computers

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Loan Amounts

Loan amounts can be excessive and give students the idea that they have a surplus of cash to spend. A rule of thumb suggests that only required materials and needs can be paid for with a loan.

For example, student loans may cover a campus meal plan but not food purchased from local fast-food joints. Bus fare or ride-share fees may be covered but not the purchase of a new car.

When in doubt about whether an item can be purchased with student loan funding or not, it’s best to speak directly to the loan provider or college financial aid department.

Got leftover money? Before going on a shopping spree, remember that that’s borrowed money and will have to be repaid, with interest.

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Federal and Private Student Loans

There are two main types of student loans: federal loans and private loans. Federal loans are provided by, you guessed it, the U.S. government, while private loans are issued by financial institutions. Each type of loan has advantages and potential caveats students should be aware of.

Financial advisors almost always recommend exploring federal options first. Applications are quickly processed, and these types of loans tend to have lower interest rates than private options. Interest rates are almost always fixed, meaning students won’t have to worry about fluctuating payments.

Another advantage is that students don’t typically have to begin making payments on federal loans until after graduation or dropping below half-time enrollment, according to the Federal Student Aid office. (Holders of parent PLUS loans for undergraduates are expected to begin making payments after the loan is fully disbursed, unless the parent requests deferment.)

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Repayment Options

Federal financial aid programs also offer more flexible repayment plans based on income, may be subsidized, and offer loan forgiveness to qualified students, the Federal Student Aid office notes.

But the benefits of federal loans don’t mean private student loan options shouldn’t be considered. For some students, like those who are denied federal funding, those for whom federal loans come up short, and those who are approved but never receive their full loan amount, private loans can be a financial lifesaver.

With a bit of grit and a co-signer with a healthy credit score, students can obtain private loans with low and fixed interest rates comparable to federal loans.

One common downside of private loans is that repayment tends to start immediately. But in some cases, private loans can offer larger sums of money upfront, allowing students to pay for nearly every expense with one loan and make only one payment a month.

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Types of Student Loans

So now that you know that there are two main types of student loans, federal and private, it’s important to know the variations of each type. These include:

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1. Direct Subsidized Federal Loan

Also known as a Stafford Loan, this option is often touted as the best type of federal loan available to applicants. That’s because a loan applicant will receive a subsidy upon graduation matching the amount of interest the loan has accrued.

In other words, a Direct Subsidized Loan will always be paid back at its original amount, despite years of accruing interest. Because it’s hard to match the benefit of an interest-free loan, it’s recommended to always accept these types of loans if approved.

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2. Direct Unsubsidized Federal Loan

Unlike the subsidized version, a Direct Unsubsidized Loan will accrue interest, which will be included in the final repayment amount.

Before accepting this type of loan, explore and calculate interest rates and the potential accrued interest to have a better understanding of potential future payments.

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3. Direct PLUS Loan

This type of federal loan is only available to graduate students or parents of undergraduates. The interest rate is higher than subsidized and unsubsidized federal loans, and a credit check is required.

This type of loan can’t be refinanced, so applicants will need a great credit score to avoid an inflated interest rate. The good news is that the interest rate is always fixed.

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4. Direct Consolidated Loan

For students with several federal loans, it’s possible to consolidate them into one account with one monthly payment with a Direct Consolidated Loan.

There is no fee to apply for this kind of loan, but all accrued interest will be rolled into the total principal balance. This leads to faster-accruing interest for students who can pay only the monthly minimum.

While it’s certainly more convenient to consolidate multiple loans, consider the additional length of the loan and additional interest paid over time before committing.

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5. Private Student Loan

It’s no secret that interest rates vary widely with private loans. But students may find that the overall amount they qualify for is often higher than federal loan limits allow. There are also loan fees to consider, but not all lenders apply these.

Federal loans often have more protections for students, but they rarely cover all of the costs that come with a college education, which is why many students find themselves with a combination of federal and private loans.

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How and When Are Student Loans Disbursed?

Whether a student chooses to accept multiple federal loans, a private loan, or a combination of the two, the money is often distributed the same way. The loan amount is sent directly to the attending school, where it is kept in the student’s account and then applied to covered costs, including tuition, fees, room and board.

When there is leftover money in a student’s account, the excess is paid directly to the student to be used for additional expenses. These payouts tend to take place once per term and vary by school. If students receive leftover funding, they can use it as they see fit or even begin to pay back the loan early.

Keep in mind that all universities have their own policies on loans and disbursement. Questions about how a specific school handles student loans should be directed to the financial aid office.

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Overage Funds

Overage funds tend to be awarded to the holder of the loan. If a student’s parents hold a loan with overage, they’re more likely to receive the leftover money.

Also, disbursements may be held for 30 days after the first day of enrollment, especially if the student is a freshman and first-time borrower, according to the Federal Student Aid office.

Entrance counseling may be required before taking out federal loans or receiving leftover money.

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Final Tips

Student loans are often a necessary step in the college journey. The world of loans can be intimidating at first, but it’s not impossible to learn how to navigate the financial waters of a postsecondary education. These final tips may help.

  • Compare all options. It’s better to have too many loan options and turn some down than face uncertainty about how to pay for everything.
  • Apply early to ensure that there’s time to make corrections if necessary. There are rules and requirements unique to all types of loans.
  • Avoid overborrowing. Try to calculate overall expenses and keep loan amounts as close as possible to the estimate. Being approved for a large loan doesn’t mean the total amount has to be accepted.
  • Get a part-time job, if necessary, to alleviate the stress that loan payments can add.

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