Student Loan Disbursement: Learn How Your Funds Reach You

Here is an in-depth detailed article on what student loan disbursement is? How it works, and when they are disbursed to you.

Updated by Vidish S on 5th October 2020

So, you have got into an educational institute and have applied for financial aid, and are ready to start your college journey. You and many others like you, who have applied for student loans might have some confusion regarding when and who the money from the financial aid goes to after being approved. Student loan disbursement is not as easy as receiving a check in your name for the amount of your loan. There is much more to it than just having the lender hand off money to the student applying for the loan. If you are completing your education using student loans, then you must understand how disbursement works. 

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What does student loan disbursement mean

Student loan disbursement is the term used to denote the procedure of your lender deploying the funds agreed to you as per your loan terms. It should be noted that the process of depositing money into your account after taking out a loan is not immediate. Rather, you must wait for a specific period as your lender gets your application in order. You might also need to perform additional tasks such as Student Loan Entrance Counselling before your lender disburses the funds.

For such financial aid disbursement, you should receive written notification from both your school and lender before your student loan is disbursed, informing you that the money is on its way. This notification must also provide details about how much you borrowed and how and when your funds will be deployed.

The funds are transferred from the lender to your school once your application is approved, and not directly to you or your bank account. The funds from a federal or private loan are used by the school to cover fees, including tuition, room and board, and other fees associated with enrollment.

The unused loan amount is disbursed to the loanee’s bank account. In several cases, the “excess” funds are utilized to cover living expenses, like rent, gas, and utilities.

How does disbursement happen?

Both private and federal student loans have somewhat similar disbursement procedures to them. For federal student loans, the specific timeline for your financial aid money to reach you depends on your school’s policy. Whereas, for private loans depends and varies from lender to lender. While federal student loans are applied using FAFSA, private student loans have to be applied to the respective lender's website portal. Days of disbursement and receiving your student loans for both federal and private can differ. Always keep a note to borrow only as much as needed to complete your educational expenses and student loans should never be used for any other purposes other than educational expenses. 

Federal student loan disbursement 

If you tendered the FAFSA, then you have applied for federal student loans from the government. Federal student loans comprise of subsidized and unsubsidized direct loans, along with PLUS loans, which can be applied by your parents in case you are a first-time borrower. You will need to complete student loan entrance counseling before your funds can be disbursed. It takes just 20 to 30 minutes to complete the counseling.

Once ready, the Department of Education will send the funds directly to your Institute. Your institution will then utilize that money to cover tuition and any other fees. If there’s any amount left over after the payments, then your institute will send it over to you.

That money can be used to supplement living expenses throughout the semester. Alternatively, you can also return that money to the lender to avoid paying interest on that amount. You also have 120 days wherein you can opt to return part of or the complete amount being lent to you without being penalized.

The reasons for returning disbursed financial aid funds can include

  • Off-campus rent might be much cheaper than anticipated

  • You accepted more financial aid money than you need

  • You got a new job

  • You received an inheritance 

  • You won a scholarship

After said time, you can still return any leftover loan money, but you will have to pay a small amount of interest if it has accrued in the time being. We all know that student loans aren’t free money, so it’s often considered best practice to borrow the minimum amount possible to make your repayment quicker and easier.

Covering your living expenses with a part-time job or scholarships instead of loans will enable you to have lower student loan payments after graduation.

Private student loan disbursement 

Although federal student loans tend to have the best interest rates and benefits, they don’t always cover the full cost of college. If that’s the case, you might decide to borrow from a private lender, such as a bank, online lender, or credit union. When it comes to disbursement of private student loans, each lender sets its policy.

  • Few lenders transfer the loan directly to your bank account shortly after your application is approved

  • In this case, it’s your responsibility to send the funds to your school’s financial aid office to pay your tuition bill

  • You’re in charge of handling the money, paying tuition, and using any leftover funds toward living expenses (or returning it to your lender)

  • On the other hand, your lender might act similarly to the federal government and disburse the loan directly to your school

  • When you borrow a school-certified private student loan, the lender typically sends your funds to your school rather than your bank account, after first getting confirmation of your enrollment status, anticipated graduation date, and cost of attendance

As with federal student loan disbursement, you should receive any remaining money after your loan has been applied to tuition and fees.

When are funds disbursed?

In most cases, you will receive your loans at least 10 days before classes start. If you are a first-time borrower, you could have a waiting period of 30 days after your first enrollment period.

Typically, student loans are disbursed in two payments a year — once per semester. To confirm this is the case at your school, reach out to your college’s financial aid office for more information.

You can have a good idea of the timeline based on the type of money you are receiving

  • Parent, Parent PLUS Loans: They are disbursed at least twice per academic year directly into a child’s school account for tuition fees, boarding, etc. The remaining funds are sent to parents or students at the request of the parent

  • First-Year Student, All Federal Aid Money: In many schools, the first disbursement takes place 30 days after the first day of enrollment

  • First-time undergraduate borrower, Direct Loans: You receive funds after you complete loan entrance counseling. However, you have to wait 30 days after the first day of enrollment

  • First-time graduate borrower, Grad PLUS Loan: You receive funds after you complete loan entrance counseling

  • Student, Work-Study Funds: If you work throughout the year, you will be paid at least once per month

  • Repeat Undergraduate Borrower, Direct Loans: Funds are received at least 10 days before the start of the term

Depending on whom you borrowed from, your lender might send the money to your school’s financial aid office, where it will be applied to tuition and fees. If there’s a difference left over, the school will then return that money to you to use on books, food, or other living expenses.

The process might be slightly different, depending on whether you borrowed federal student loans from the Department of Education or private student loans from a bank or a credit union student loans.

Student loan disbursement requirements

There are a few things that must be completed before your college can provide you with your student aid money

  • Eligibility Verification

  • Ensure that you are registered for the required number of classes or units/credits for the duration of the payment period

  • Entrance counseling is required for students and first-time borrowers

  • Resolution of any conflicting information on your FAFSA, if any

  • Signing the Master Promissory Note (MPN) for Direct Subsidized and Unsubsidized Loans, Parents must sign the MPN for the Parent PLUS Loan

Learn more about Master Promissory Note

Complications may arise during federal or private loan disbursement even though the process is fairly straightforward. This can happen especially when students refinance their loans.

The duty of ensuring that the funds make it to the intended destination on time and in full amount falls onto the student.

Missing a due date during the Refinancing or Consolidation process will result in the student getting marked with a late payment on their credit report, which becomes difficult to report and rectify later on.

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Special rules for student loan disbursements

Two special rules apply to student loan disbursement

30-Day Delay

  • First-year, first-time undergraduate borrowers might have to wait for 30 days to receive their first disbursement

Two Disbursements Rule

  • Student loan disbursement needs to be performed in at least two payments, wherein the second payment has to be made after the mid-point of the loan period

  • If multiple academic terms are covered by the loan payment, the funds must be disbursed once per term.

  • Disbursements have to be made in equal installments which are no larger than half the total loan amount

The rules mentioned above can be waivered in case the college has a low loan default rate.

It is advised to keep a note that disbursement day is the day when you get your loan funds and the day when your unsubsidized Direct Loans or PLUS Loans start accruing interest while you are in school. It is advised that the more you pay off now, the better you will be in the future. Knowing the terms set by your lender for loan disbursement is an important step in claiming your loaned amount. Avoiding confusion about your disbursement terms will help you stay on track regarding when and how your loan amounts are spent and if you are due to receive any remaining amount as a stipend.