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 it is imperative for you to understand how disbursement works.
Table of Content
- What is a disbursement?
- How does disbursement work?
- When are your funds disbursed?
- Consolidation and Refinancing
- Credit balance and Refunds
- Special Rules
- Other Requirements
- Grant Disbursement
- Student Loan Repayement
What does Student Loan Disbursement actually mean?
Student loan disbursement is the term used to denote the procedure of your lender deploying the funds agreed to 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 of time 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 it all WORK?
Federal Student Loan Disbursement (FAFSA Disbursement)
If you tendered the Free Application for Federal Student Aid (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 for 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 back to the lender to avoid paying interest on that amount. You also have a 120 day time period 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 actually 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 in order 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 own policy.
Some 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 own 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 your funds going to be 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.
The specific timeline for your financial aid money to reach you depends on your school’s policy. 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 prior to 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.
That said, the process might be different, depending on whether you borrowed federal student loans from the Department of Education or private student loans from a bank or credit union.
How do Consolidation and Refinancing affect your loan disbursement?
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.
What about my Credit Balance and Refunds?
Any remaining credit balance must be refunded to you within a certain amount of time, depending on when the credit balance was created.
On or before the first day of classes: No later than 14 calendar days after the first day of classes
After the first day of classes: No later than 14 calendar days after the credit balance was created
Refunds from your student account may be delivered by:
Prepaid debit or ATM card
Electronic funds transfer (EFT) to your bank account
Your refund can be used to pay for other college costs, such as supplies, textbooks as well as transportation to and from school, rent (in case you live off-campus), dependent care, computer equipment and software, and other miscellaneous expenses.
Special Rules for Student Loan Disbursements
There are two special rules that apply to student loan disbursement:
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.
Some Other Loan Disbursement Requirements
There are a few things that must be completed before your college can provide you with your student aid money:
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
What about Grant Disbursement?
Colleges have greater flexibility for disbursements regarding grants:
Federal Supplemental Educational Opportunity Grants (FSEOGs)
Federal Pell Grants
Iraq and Afghanistan Service Grants
Colleges have the choice to disburse these funds either in a single lump sum or in multiple disbursements.
Student Loan Repayment
You can wait to start the financial aid repayment until the repayment period begins. However, repayment can begin as soon as your loans are disbursed. Undergraduate borrowers and grad PLUS borrowers don’t have to start repaying their loans until six months after graduation, leaving school or dropping below half-time enrollment.
Parent borrowers can choose to make payments immediately or choose a deferment option from below:
Defer all payments until their child graduates or falls below half-time enrollment
Defer all payments until 6 months after their child graduates or falls below half-time enrollment
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.
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