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?
Generally speaking, both federal and private student loans are disbursed directly to the school to pay for things like tuition, fees, and room and board. Continue reading for additional clarification and guidance on federal and 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 2022-23 school year is $10,940 for an in-state undergraduate student at a public college and $39,400 for a private college student, according to data collected by the College Board.
So borrowing becomes the normal route. Student loans be used to cover expenses such as:
• Tuition and fees
• Books and supplies
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.
Types of Student Loans: Federal and Private
There are two main types of student loans: federal loans vs. private loans. Federal loans are provided by 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.)
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 potentially a cosigner 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.
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. Continue reading for each type of student loan explained.
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.
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, use a student loan payoff calculator to calculate interest rates and the potential accrued interest to have a better understanding of potential future payments.
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.
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 Consolidation 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.
Private Student Loan
It’s no secret that interest rates vary widely with private loans. That’s because private lenders will evaluate factors like an individual’s credit score and request student loan proof of income. 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. Though it’s worth mentioning that because private student loans lack the borrower protections afforded to federal student loans, they are generally considered an option only after all other sources of financing have been exhausted.
How Long Does It Take to Get Student Loans Disbursed?
Disbursement is a term that describes when a loan is actually paid out. Disbursement timelines may vary depending on whether the loan is a federal or private student loan.
Federal Student Loan Disbursement
To get a federal student loan, interested students must fill out the Free Application for Federal Student Aid, otherwise known as the FAFSA®. Information provided on this form will be used to determine how much federal financial aid and what types a student will qualify for — including federal student loans.
Generally, FAFSA applications are completed quickly. Online applications can be reviewed in as little as three to five days. Federal student loans are generally disbursed directly to the school sometime between 10 and 30 days after classes start.
Private Student Loan Disbursement
The application for a private student loan will be conducted with the individual lender. Each lender will have its own policies for applications and approvals. Generally speaking, it may take between two and 10 weeks to process a private student loan.
Private student loans are also generally disbursed directly to your school. The disbursement date may be timed to the start of the school year, though, this may vary depending on when you apply for and are approved for a private student loan.
How 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. As briefly mentioned, 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.
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.
Common Student Loan Disbursement Issues
It’s possible for issues to crop up that could impact your disbursement.
• Missing application deadlines. Applying for a private student loan or filing the FAFSA too late could impact when your student loan is disbursed. To avoid any late disbursements, be sure to submit your FAFSA before state or school-specific deadlines.
• Making mistakes on the application. If there are errors on the FAFSA or a private student loan application, this could impact your approval or potentially delay the disbursement date as you fix errors and re-submit the application.
• Forgetting to complete entrance counseling for federal student loans. You must complete the entrance counseling required for federal student loans before they are disbursed. Be sure to read the terms of all loans closely and fill out all paperwork properly to ensure timely disbursement.
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 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.
Curious about private student loans? Consider applying for a private loan from SoFi. With an all-online application, no fees, flexible repayment plans, and possible rate discounts for SoFi members, SoFi can smooth the path to a college degree.
Oh, and SoFi makes it easy to add a cosigner to an application.
Do student loans get deposited into your bank account?
Typically, student loans do not get deposited in your bank account. Instead, the loans are disbursed directly to the school where it is applied to tuition payments and room and board. If there is any money leftover after paying for tuition, the money will then be distributed to the student. These payouts tend to take place once per term and vary by school.
How long do student loans take to deposit?
After applying through the FAFSA, it may take up to 10 days to find out what types of aid — including student loans — you are eligible for. If approved for a federal student loan, this money will be disbursed directly to the school. Typically, this will happen within the first 30 days of the start of term.
What does disbursement mean?
Disbursement is when the loan amount is paid out to the borrower. In the case of student loans, the loan is typically disbursed directly to the student borrower’s school.
Can you use a student loan to pay a tuition bill that is past due?
Yes, you can use a private student loan to pay off an outstanding tuition balance. Each lender determines how far in the past a loan can be used to pay an overdue balance, but many will allow loans to cover past-due balances that are 6-12 months outstanding.
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