Most families use some student loans to cover the cost of college. But oftentimes there’s confusion on how the money is distributed. Are they paid directly to the student or are they transferred to the school? 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.
How Financial Aid Disbursement Works
Financial aid can be sent to the student or the school. The exact method depends on the type of financial aid and the source.
Most financial aid is transferred directly to the student’s account with the school. This includes scholarships, grants, work-study paychecks, and loans. 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 or sent back to the organization or lender.
There are scholarships and student loans that go directly to the student. Students usually prefer this option as it allows them to decide what they do with the funds. However, some financial aid organizations, especially scholarships, state that the money can only be used for a specific purpose, such as tuition or tuition and fees.
How Student Loan Disbursement Works
There are two types of student loans that you can apply for: federal student loans and private student loans. The eligibility criteria for each type 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.
Are Federal Student Loans Paid Directly To the Student or the School?
Most federal student loans and grants, such as the Pell Grant, disperse directly to the student’s school account. There, the money goes towards tuition and fees, as well as room and board if you’re living on campus. If the loan is more than the cost of these three items, the money is then given to the student to be used towards other education-related expenses, such as books and supplies.
There are some exceptions. Direct PLUS loans for parents are applied to the student’s school account and can be used towards tuition, fees, room and board, and any authorized charges. If money is left over, it can be sent to the parent or the student, depending on the parent’s decision. Money earned from work study programs usually pays directly to the student. However, the student can opt to put the money towards their school account as well.
If your school payments are coming due and you haven’t received notification about whether your loans have been applied to your balance, check your Federal Student Aid (FSA) online account and see if your contact details are correct. If they are, contact the lender and the school to determine if there’s a delay or other issue that needs to be corrected on your end.
Are Private Student Loans Paid Directly To Students or the School?
Private lenders vary in the ways they disburse student loans as every lender sets their own guidelines.
Most banks, credit unions, and other lenders tend to offer school-channel private student loans. These loans disperse directly to the school. Similar to federal student loans, private lenders work with the school, determine the cost of attendance (COA) and make sure that tuition, fees, and other mandatory expenses are covered first. If there’s any money left over, the student can decide to send that money back to the financial institution or have it sent to their private bank account.
Direct-to-consumer private student loans are student loans that go directly to you and the school will be hands-off during the transaction. If approved, the money will be transferred to your bank account and you can use it towards any education-related expenses you’d like. While you don’t technically need to start with tuition – you can buy books first, if you want – you should pay off mandatory expenses first to make sure you don’t have issues with your balance and being allowed to attend classes at a later date.
Should You Choose a School-Channel or Direct-to-Consumer Private Student Loan?
In most cases, it’s advisable to go with a school-channel private student loan over a direct-to-consumer option. School-channel loans tend to have lower interest rates and fewer fees. It’s also could be financially safer. When the money is directly distributed to your bank account, make sure to set a budget so you know you’ll have the fund on hand when you need to pay that tuition balance.
How Much Should You Borrow in Student Loans?
Generally, you should borrow only what you need in loans. The more you take out now, the more you’ll owe later in interest. You can use a Student Loan Calculator to see just how much different loan amounts will cost you in the long run.
To determine how much you’ll need to take out in loans, think about all of the financial aid you received so far vs. the cost of attendance and related education-expenses.
Do you need a student loan to cover the gap in your college costs? We make it easy to compare your options with our Student Loan Finder.
| 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 |
 |
4.63% - 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 |
