If you’re not familiar with how student loans work, you might be expecting a big check in the mail after being approved. But in most cases, the school you’re attending is actually in charge of managing those funds.
Read on for a more in-depth explanation of student loan disbursal, including situations where student loan funds may be distributed directly to the borrower.
Student loans paid directly to a student
There are two ways that a student loan can be disbursed: direct-to-consumer or school-channel. A direct-to-consumer loan is when the lender sends borrowed funds directly to the student. A school-channel loan is when the lender sends the funds to the college or university.
All federal student loans and most private loans are school-channel loans. If there is money left over after tuition, fees, and other necessary expenses have been paid, the student may receive those extra funds as a check or bank deposit. If you end up receiving extra funds, you generally should use them for expenses related to your education or necessary living expenses, like buying groceries, textbooks, or software.
Direct-to-consumer loans often have higher interest rates and fees because the money is going directly to the student instead of the institution.
Students are still required to report how much they receive in direct-to-consumer loans to the financial aid department at their school. The department will use those figures to determine how much aid a student qualifies for. Taking out too much in direct-to-consumer loans can cause you to lose eligibility for other types of funding.
Income disbursement from a work-study job
Work study is a type of aid offered to students who qualify based on financial need. With work study, students get a job on campus or with an organization affiliated with the school. They usually work between 10 and 15 hours a week and are paid minimum wage or slightly more.
The money a student earns is sent to them directly, and they can use it to cover textbooks, living expenses, or anything else related to school or not.
Employers may pay students with a physical check or directly deposit the funds into a bank account, just like with a traditional job. However, students can also request that the money be sent directly to the school to pay for tuition or other expenses. The payment frequency for a work-study job depends on the provider but is usually every two weeks.
How student loan disbursement works
Federal student loans are disbursed to the school before the beginning of the semester. Students are notified when disbursal occurs. If you don’t receive a notice about disbursement, make sure your contact information is correctly listed on your Federal Student Aid (FSA) online account.
The money is applied to tuition, fees, and other school-related expenses. If you’re living on campus, the loan funds may be used to pay for room and board. If you’re taking lab classes, they may be used to pay lab fees. Parking permits and optional cafeteria plans may also be covered by your loan funds.
Most lenders pay schools first because it’s easier for both the school and the student. A student doesn’t have to worry about transferring large amounts of money, and the school doesn’t have to worry about getting paid on time.
Before your first federal student loan is disbursed, you have to complete entrance counseling. Entrance counseling helps you understand how student loans work, what the terms mean, how interest is calculated, and more. The U.S. Department of Education requires just one 30-minute online session, but your school may require additional counseling.
>> Read More: Student loan disbursement
Returning student loans
If you receive extra funds that you don’t need, you may be able to return them and avoid paying interest. The time frame for when you can return those funds depends on the lender.
For federal student loans, you can cancel all or part of the loan 120 days after receiving it and no interest or fees will be charged.
If you take out private student loans and want to return the money, contact the lender directly. It’s usually harder to return money to a private lender. In this case, your best option is to keep the money to use for future expenses and ask for a lower loan amount next semester.