How Are Student Loans Disbursed?

8 min read

Students borrowing money to finance their college education often have little knowledge about how student loans work after graduation. Many students learn later that they may not qualify for federal loan forgiveness programs once they graduatethey graduate.

Student loans can be confusing as borrowers go through different stages of repayment, including paying off the principal and interest, making payments toward the principal balance, and repaying the remaining principal balance. These steps occur at various pointspoints during repayment. Each stage requires a payment to begin or continue.

A student’s monthly payments can vary based on several factors, depending on the type of loanhe or she he or she chooses. Payments generally range between $0 and $100 per month. Different types of loans require different payment amounts. Interest rates for private loans tend to be higher than those for federally guaranteed loans. Borrowers who make larger payments early in the loan term pay less over time. Other factors that affect the amount of interest paid include the length of the grace period (the time before the borrower begins to repay), the total amount borrowed, and the number of years the borrower takes to graduate.

The following table shows typical student loan payment plans:

Payment Schedule Principal Repayment Period Monthly Payment Percentage of Total Due Loan Paid Off in MonthsPayment Schedule Principal Repayment Period Monthly Payment Percentage of Total Due Loan Paid Off in MonthsRepaid in Years Graduated After 12 months 2 years 4 years 5 years 6 years 10 years 15 years20 and 30 years 20 and 30 years

Federal Stafford Loans

Federally subsidized student loans are called “federal” or “direct” student loans. Federal student loans are offered only to eligible undergraduate students attending schools participating in direct lending programsdirect lending programs. These loans were created to help ease the burden of student debt. In exchange for receiving these loans, students agree to enroll in and complete certain educational requirements set forth by the lender.

Generally speaking, interest accrues on the unpaid portion of any outstanding loan while enrolled at least half-time in a Direct Loan Program. A portion of the interest is added to the original loan principal; the remainder goes to cover overhead costs. Because of these overhead costs,direct loans direct loans carry significantly lower interest rates than other types of student loans. Students should keep track of theirdirect loan direct loan balances, both current and total, using statements received quarterly.

Borrowers have three options for repayment of their direct loansdirect loans:

Direct Subsidized Loans—PayableLoans—Payable monthly.

Direct Unsubsidized Loans—PayLoans—Pay with income.

Direct PLUS Loans—ToLoans—To supplement funding for dependent children, spouses, parents, or elderly relatives.

If a borrower continues working past his/her expected graduation date, he/she is responsible for making monthly payments until the entire loan is repaid. If a borrower does not repay the loan on time, the government may charge late fees or take legal action against the borrower.

Private Education Loans

How AreHow Are Student Loans Disbursed?

Direct Subsidized LoansLoans (DSL)

The Federal Family Education Loan Program (FFELP), sometimes called student loans, is the federal government’s primary loan program for postsecondary education for undergraduate students, graduate students, and parents of dependent children up to $50,000.

PLUS Loan for ParentsPLUS Loan for Parents

A ParentalA Parental Plus Loan is a type of FFELP loan that is offered to both undergraduate and graduate students who have their parents co-signing on the loan. Parents make monthly payments while undergraduate and graduate students pay off their loansloans after they complete school. To qualify for a parental loan, students need to have at least half of their family income come from their parents’parents’ earnings.

Direct Unsubsidized Loan (DUSL)

A DirectA Direct Unsubsidized Loan is a type of loan that is designed specifically for those students without financial assistance from a parent or relative. A student can qualify for a DUSL if he/she meets certain criteria,criteria, including being enrolled full time at a participating institution, having a FAFSA debt-to-income ratio below 8%, and not receiving any financial aid from a parent or relative, among others. Students can choose between a fixed or variable rate andeither a either a 10, 15, 20, 25, 30, or 35-year35-year repayment period.

The FederalThe Federal Perkins Loan

A FederalA Federal Perkins Loan is a small business loan that is administered by the U.S. Department of Education and provides funds to eligible institutions to help low-income students attend college. Eligible students may apply for up to $2,500 in funding each year. Each institution determines its own eligibility requirements.

Guaranteed Student Aid (GSA)

Guaranteed Student Aid is another type of direct loan that can be awarded to students based on financial need. Every year, student lenders must participate in the GSA program. However. However, borrowers do not have to repay the loan until they withdraw from school or leave school before the completion date.

Income-BasedIncome-Based Repayment (IBR)

Income Based Repayment is a repayment option for undergraduate and graduate students who receive Pell Grants, Stafford Loans, and Perkins Loans. In general, IBR requires borrowers to pay 10% of discretionary income toward their outstanding balance and limits interest rates to 5%. However, some private lenders offer IBR programs with different terms.

PAYE stands for Pay As You Earn.PAYE stands for Pay As You Earn.

Pay As You Earn (PAYE) is a repayment option for undergraduates and graduates who don’t qualify for any other types of federal loansloans. Under PAYE, undergraduate and graduate borrowers whose families earn less than $60,000 annually must pay no more than 12% of their discretionary income toward the cost of attendance. Graduate borrowers must pay no more than 9% of their discretionary income towards the cost of attendance. Borrowers may also elect to pay the entire amount due over a five-year period.

How AreHow Are Student Loans Disbursed?

The FederalThe Federal Education Loan (FEL) Program

The FEL program is administered by the Department of Education and is designed to provide grants to students who have demonstrated financial need. A loan repayment plan is set up for each student based upon their projected earnings while attending school.If the student meets certain criteria, the government repays the loan and the principal balance after six years. If the student meets certain criteria, the government repays the loan and the principal balance after six years.

The DirectThe Direct PLUS Loan Program

Any parent who does not qualify for a student loan under the FEL program may apply for a PLUS loan. Under this program, parents who do not currently make enough money to pay for college can borrow funds to help with tuition costs. Students can also use these loans to cover any additional expenses associated with school,school, such as books, transportation, etc.

The PerkinsThe Perkins Loan Program

Perkins loans are granted directly to students attending private institutions. Parents and lenders cannot apply for a Perkins loan. However. However, the student can receive funding without parental consent. Perkins loans must be repaid over a period of four years,years, with interest rates varying based on the type of institution attended. There is no grace period after graduation before payments begin. After the first year of enrollment, borrowers must start making monthly payments.

The StaffordThe Stafford Loan Program

Stafford loans are issued by the U.S. Department of Education and are guaranteed by the federal government. Loans are awarded based on a combination of factors,factors, including family income and assets, credit history, and cost of attendance information provided by the applicant. Borrowers can choose between subsidized and unsubsidized versions of the program. UndergraduateUndergraduate studentsare the only ones are the only ones eligible for subsidized loans. Unsubsidized Stafford loans are given out to graduate and professional degree candidates. Interest accrues immediately following acceptance into school. Payments must be started once a borrower receives notification that they have been accepted into a school.

How AreHow Are Student Loans Disbursed?

This video gives a general overview ofof how student loans work.

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How AreHow Are Student Loans Disbursed?

Private student loans

Private student loans work similarly to what they do with credit cards; once you have borrowed money, you pay interest while you’re using the loan. You borrow $10,000 and agree to repay $15,000 over a period of four yearsat a at a 16% annual interest rate. If you default on payments, you’ll owe the lender the total amount you borrowed plus any accrued interest. In most cases, private lenders give borrowers three to five business days to make their first payment after receiving notification that they’ve been accepted. After making the initial payment, you’ll receive monthly installments. These payments are sent directly to the bank where you opened your account; if you don’t have direct deposit set up, your lender may send a check to your address each month.

Government-backed loans

Government-backed loans generally fall under two categories: Federal Direct Loan Programs and Perkins Loans. Both programs provide low-interest loans to students who qualify. Your eligibility will depend on whether you’re enrolled full time or not, whether you have federal income tax liability, and your family’s financial situation. If you have taxable income, you won’t need a government-backed loan. But. But if you don’t have taxable income, you’ll need to complete the Free Application for Federal Student Aid (FAFSA), a free application based on information from your IRS W-2 forms. You must file your FAFSA by February 15th to get aid the following year.

Perkins Loans are administered by the U.S. Department of Education  and are only available to undergraduate students who attend schools participating in the program. YouYou’ll fill out an online application for a Perkins loanapplication for a Perkins loan. You’ll then be asked to submit additional documentation to verify your eligibility. There’s no minimum income requirement for Perkins loans, but you must prove that you have a high school diploma or GED. Once you’ve completed the application, you’ll be notified about your acceptance into the program. You’ll then be given a date to enroll in classes and begin repayment. However, unlike most other loan options, you won’t enter into repayment immediately. Instead, you’ll start paying back your loan a few weeks before your scheduled enrollment dates. Repaymentbegins on begins on October 1st of your senior year and ends six months later. Unlike private loans, you won’t incur any fees or charges. Your monthly payment is calculated based on your estimated family contribution and your expected family size.

Like Perkins Loans, FederalLike Perkins Loans, Federal Direct Loans require a higher credit score than Perkins Loans, but unlikeunlike Perkins Loans, they’re not tied to specific schools. Like Perkins Loans, these loans aren’t subject to income restrictions, and you won’t have to complete the FAFSA. Adirect loan direct loan requires an origination fee ranging between 2 and 6%, depending on your chosen degree and repayment term. The maximum federal loan amount is currently $20,500 per academic year.

If you decide to take out either type of student loan, you should know the terms of repayment. Most private lenders allowyou a you a 12 monthmonth grace period before requiring payments, but they may charge you fees if you fail to make your first payment on time. Both public and private lenders must be paid off prior to graduation, and you’ll be responsible for repaying the entire amount even if you graduate early. Additionally, many private lenders offer optional deferments, forbearances, and extensions if you’re having trouble keeping up with your payments.

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