Most families use student loans to cover the cost of college. But the confusion often lies in understanding how the funds are distributed. Are they paid directly to the student or are they transferred into an account? Are there any federal or private student loans that go directly to you?
Here’s what you need to know about how student loan disbursement works.
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How student loan disbursement works
There are two types of student loans that you can apply for – federal student loans and private student loans. These are both very different from each other in all respects. The eligibility criteria is different and so are the disbursement methods and the repayment options.
When you apply for a student loan, the lender will let you know if there are student loans that go directly to you. If the funds are paid to you directly, you will need to provide your bank details. If the funds are paid to the school, they will require your school’s account details.
Here’s a look at how federal and private student loan disbursement works.
Are federal student loans paid directly to the student or to the school?
It depends. There are some federal student loans that go directly to student while others are paid to the school.
Most financial aid is transferred directly to the school’s account. This includes scholarships, grants, work-study paychecks, and loans. The funds from these financial aid avenues go directly to the school. From there the funds are applied to your tuition payments, college fees, on-campus housing payments, and more. Once all outstanding college expenses are paid for, any outstanding funds may be transferred to you. You can use this money for everyday living expenses.
There are some scholarships and student loans that go directly to the student. Most students prefer this option as it allows them to decide what they do with the funds and how to spend it. Others may prefer not to have the loans paid directly to the student. They find that sort of control a bit too tempting to spend the money on more superfluous things. This is exactly why so many financial aid sponsors opt to send directly to the school in the first place.
Federal student loans are disbursed either to the school or to your account before the beginning of the semester. You should receive a notification that the money has been transferred and where it has been sent. If you do not receive any disbursement notification closer to the payment deadline, you must be proactive. Check your Federal Student Aid (FSA) online account and make sure that your contact details are accurate. Correct them if they aren’t. Also, call the lender and get an update on the loan status.
Are There Private Student Loans Paid Directly to Students?
Private lenders vary in the ways they disburse student loans. Every lender sets their own guidelines. Most lenders do not have the funds paid directly to students. They prefer to pay schools first as it’s more convenient for them to make payments to larger institutions rather than individual borrowers. Schools too prefer this as they know they will get the funds on time when it’s coming directly from the lender. Students can often forget the payment deadlines creating issues for the school as well as the student.
So essentially, there are two ways that a student loan can be disbursed: School-channel and Direct-to-consumer.
School-Channel Private Student Loans
School-channel private student loans are sent directly to the school. You apply for the loan and work with the lender through the loan application process. Once the loan is approved and processed, the lender then works directly with your school from there on.
The lender will inform the school that you’ve applied for a loan and ask them to verify the amount you’ve applied for. The school will look into the scholarships, grants, and federal student loans that you’ve already been awarded. Your total financial aid, including free, federal and private aid, should not exceed the total cost of attendance.
If your total financial aid is more than the total cost of attendance, your school will reach out to you and tell you to reduce the loan amount. The lender will only complete the loan processing after you’ve requested a smaller loan amount and your school signs off on the total.
On completing the loan process, the lender will then send the funds directly to your school. The school will allocate the funds to pay for tuition, dorm fees, and meal plans. They will then transfer the balance to you to use towards other expenses such as school supplies, gas and other living expenses.
Direct to Consumer Private Student Loans
Direct-to-consumer loans are private student loans that go directly to the student. The school plays no part in these types of transactions. You work with the private lender to get your loan approved. When it is processed, the funds will be transferred directly to your bank account.
The advantage of direct-to-consumer loans is that the application process is simpler and faster. There’s no third-party involved. The downside however is that the fees or interest rates are usually slightly higher.
When taking this type of loan, what’s really important is to make sure that you don’t borrow more than you need. Calculate all the other financial aid you’ve received and only borrow exactly what you need. Do not get tempted to borrow more ‘just in case’. Remember, interest starts accruing from the day the funds are disbursed. The hundred dollars extra that you borrow will end up costing you much more in accrued interest. It’s not worth it.
| Lender | Rates (APR) | Eligibility | |
|---|---|---|---|
 |
5.50%-16.12%* Variable
3.99%-15.61%* Fixed
|
Undergraduate and Graduate
|
VISIT CITIZENS |
 |
5.54% - 15.70% Variable
3.99% - 15.49% Fixed
|
Undergraduate and Graduate
|
VISIT SALLIE MAE |
 |
5.00% - 17.99% Variable
3.49% - 17.99% Fixed
|
Undergraduate and Graduate
|
VISIT CREDIBLE |
 |
6.00% - 13.75% Variable
3.99% - 13.75% Fixed
|
Undergraduate and Graduate
|
VISIT LENDKEY |
|
|
5.66% - 14.72% Variable
3.69% - 14.56% Fixed
|
Undergraduate and Graduate
|
VISIT ASCENT |
 |
3.70% - 8.75% Fixed
|
Undergraduate and Graduate
|
VISIT ISL |
 |
5.62% - 16.85% Variable
3.69% - 16.49% Fixed
|
Undergraduate and Graduate
|
VISIT EARNEST |
 |
5.00% - 14.22% Variable
3.69% - 14.22% Fixed
|
Undergraduate and Graduate
|
VISIT ELFI |
