How Are Federal Student Loans Distributed?
After completing the FAFSA report, and finding out what loans they have been awarded, students’ biggest question is “How am I going to get my money?” Well, Federal Student Loans, in particular the Federal Stafford Loan, are distributed to students in two ways, either Federal Direct (FDLP) or Federal Family Education (FFEL).
Federal Direct Loans
Federal Direct Loans have a much more rigid usage requirement than the Federal Family Education Loans. This is because they are sent from the U.S. Treasury to the Department of Education. From there, the student’s school receives the check and then it is presented to the student, but only after it has first been applied to tuition, fees, room, and board and any other charges placed on the student by the school. If there is any money left over, it will be given to the student in either check or cash form. This method is meant to prevent fraud, so that students do not receive monies when they are not even enrolled in the school. It is also a means of controlling how students use their financial aid money, ensuring it is spent on what needs to be paid for, rather than on frivolities. These funds are given to the student in installments as well.
These loans usually have a low limit, due to the high volume of students that need these sorts of loans. However, knowing that students usually devote their full time to studying, and not making a living, students are given a six month grace period before they have to begin paying the loan back.
Subsidized Loans
When a student is in financial need, subsidized federal loans are available to them. Financial need usually depends on the student’s or the student’s parents’ income compared with the projected cost for attending the school they plan to attend. For subsidized loans, the federal government makes the interest payments on the loan while the student is still in college, so when the student graduates or leaves school for some reason, their current bill is the same as their original tuition cost.
Unsubsidized Loans
While unsubsidized loans are also guaranteed by the federal government, the interest is not paid for the student. Thus, when a student leaves school, their bill will be their original tuition compounded with the interest that stacked up over their college career. Although students can certainly pay on the interest while they are still in school, not many students have the means or foresight to do so.
Federal Family Education Loans
Federal Family Education Loans are paid to parents, and are treated much more like consumer loans (such as car payments or mortgages) who have fronted the money for the students’ tuition. Like the Federal Direct Loan, this loan is also sent from the school in at least two installment checks from the student’s school, but only after the loan is applied to the student’s tuition, etc. These loans, being funded by private bank capital, have a much higher payout limit than Federal Direct loans, however, parents have to start making payments immediately.
These loans are usually called PLUS loans. Unlike Signature Student Loans, PLUS loans are not cosigned by parents, but are taken out by parents. A FFEL or a PLUS loan is the parents’, and the parents’ alone, responsibility. In this instance, if the parents do not begin paying on the loan immediately, and pay the amount off in the time allotted, it will be their credit on the line, and not the student’s credit.