Rebecca Lake is a certified educator in personal finance (CEPF®) and freelance writer specializing in finance.
Expertise: Insurance planning, education planning, retirement planning, investment planning, military benefits, behavioral finance
Erin Kinkade, CFP®, ChFC®, works as a financial planner at AAFMAA Wealth Management & Trust. Erin prepares comprehensive financial plans for military veterans and their families.
Disbursement of student loan funds is not as straightforward as receiving a check in the amount of your new loan. It involves much more than the lender handing over cash.
We’ll cover how student loan disbursement works for federal and private loans and what complications may arise during the process.
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Student loan disbursement is the process by which loan funds are paid out to cover higher education expenses.
When student loan funds are disbursed and whether they’re paid to the school or the borrower depends on the type of loan:
The private student loan disbursement process also depends on which lender you choose.
Student loans are sent to the borrower’s school according to a schedule established by individual colleges and universities. This schedule usually aligns with the beginning of the semester or academic year.
When you’re approved for student loans, the money is sent to the school to cover qualified education expenses. Following the IRS definition, qualified education expenses include tuition, fees, and other related expenses to cover the cost of attendance at an eligible educational institution.
Loans are disbursed to the school first to ensure all necessary expenses are paid ahead of the student’s attendance. Any remaining amounts can then be disbursed to the student in the form of a refund. Parents who take out Direct PLUS loans or private parent student loans can also receive refunds.
Students may use their refund to pay rent or basic living expenses. They can also apply refunds to their student loan balance if they don’t need the money for any other school-related costs.
This is the general process for the disbursement of student loans. Federal student loan disbursement and private student loan disbursement have several differences.
Federal student loans are administered through the Department of Education. To establish eligibility for federal student loans, borrowers must complete the Free Application for Federal Student Aid (FAFSA).
Federal student loan options include:
In most cases, funds should be disbursed within 10 days of the start of classes. That’s according to the Federal Student Aid Handbook.
When a federal student loan is approved, the U.S. Treasury Department transfers the funds to the Department of Education. The Department of Education confirms the loan amount and other details with the school, including disbursement dates and when funds are sent.
Once the school receives funds, it uses them to pay the borrower’s qualified education expenses, disbursing any leftover amounts as a refund. The borrower can then decide how to use the funds.
If you’re a first-time borrower and a first-year undergraduate, you may need to wait 30 days after the first day of your enrollment before the school can disburse extra student loan funds. First-time federal borrowers may need to complete entrance counseling before loans are disbursed.
Entrance counseling is designed to ensure that borrowers understand the terms and conditions of their loans. The counseling session covers what a loan is, how interest works, options for repayment, and what happens if you default on the loan. Borrowers who are required to complete entrance counseling must do so before loan funds can be disbursed.
After federal loans are disbursed, students have 120 days to cancel them without interest or fees. Students can cancel part or all of the loan amount.
Government shutdowns do not affect a student’s ability to complete and submit the FAFSA and apply for federal aid. The Office of Federal Aid can continue to process applications for federal student loans and grants during this time.
Likewise, federal student loan servicers continue operations even when the government is in shutdown mode. For borrowers, that means little to no impact on their loans, including the disbursement process.
Private student loans are from private lenders rather than the Department of Education. If you have private student loans, it’s helpful to ask your loan servicer about its specific timeline.
Some private lenders may disburse loans to the school, while others can distribute funds to the borrower. When a loan is paid to the student, it’s the borrower’s responsibility to ensure that tuition, fees, and other qualified expenses are paid.
Private student loan disbursement to the school works much like federal student loans. Once you’re approved for a loan, the lender has to certify the loan with the school and verify your enrollment status, costs of attendance, and expected graduation date.
When the school receives the loan, the lender sends the loan amount to cover tuition, fees, and other costs. Any remaining amount is disbursed to the student as a refund.
The process for disbursement of student loan funds can vary by lender. Here’s how private student loan disbursement works with four top-rated lenders:
| Lender | Disbursement policy |
| College Ave | The school applies the loan to outstanding balances and then refunds any remaining funds to the borrower. Once the school certifies the loan, you’ll get a notification from College Ave that includes disbursement dates. |
| Sallie Mae | Once a Sallie Mae loan is approved, a certification request is sent to the school. Loan funds are disbursed to the school once certification is received and the right-to-cancel period expires, with any remaining amounts refunded to you. |
| Ascent | Ascent sends funds to your school at the school’s request, once the loan has been certified. Loans cannot be disbursed until the school completes the certification process. |
| Earnest | Once you sign a loan agreement with Earnest, the loan certification process begins. This can take 1 – 3 weeks, depending on the school. Following certification, there is a three-day mandatory cooling period before loan funds are disbursed to the school. |
Student loans are first disbursed to schools to ensure the student’s necessary attendance costs are paid. The school will verify whether the loan aligns with the cost of education or if any adjustments need to be made.
Disbursing student loans to the school is a form of risk management for lenders. By paying the school first and refunding any overage amounts to the student second, the lender ensures a borrower isn’t taking out a large loan and using it for purposes other than education.
Direct student loan disbursement also benefits the borrower. Even if you intend to use loan funds to pay for school-related expenses, you might not know where to send the money once you get it. Direct disbursement saves you the trouble of making payments to the school, and it means you don’t need to worry about missing payment deadlines.
Student loan disbursement can become complicated if you’re refinancing private student loans or consolidating federal student loans. The disbursement timeline will depend on the lender. But if you’re no longer in school and you’re refinancing, the new lender will disburse funds to your old lender.
It’s important to understand the timing when refinancing student loans to avoid the possibility of late or missed payments. Disbursements can take time to process, so you may need to make payments to the old loan until funds are sent to the lender.
Doing so can help you avoid any late payments being reported to the credit bureaus. Negative payment history can have a significant impact on your credit scores. Keeping track of payment due dates during refinancing can also help you avoid late fees.
Here are our tips to ensure your borrowing process goes as smoothly as possible.
Remember that student loan disbursement is not a speedy process. Approval can happen within days, but disbursement could take several weeks or even months.
Begin the student loan application process well before the semester or term starts. This helps avoid scenarios where you’re ready to start school, but your loans are still in disbursement limbo.
If loan funds are late, your school might charge late payment fees or finance charges. Schools may reverse these charges once your loan funds are disbursed. Ensure the anticipated aid covers tuition, fees, and other charges to prevent class drops while waiting for disbursement.
Applying early for federal or private student loans is the best way to avoid potential issues with late disbursements. Early applications give you ample time to address any unforeseen delays.
After approval, connect with your lender or loan servicer to find out the disbursement schedule. This helps you stay informed about when funds will be available.
As the semester or term start date approaches, follow up with your school to ensure loan certification and disbursement go smoothly. This proactive approach can help mitigate any last-minute issues.
