How Do Student Loans Work?


Quick Answer

Funds from a student loan typically go directly to the school, not to the individual. The school totals the amount owed for tuition, fees and any other charges, then subtracts scholarships, grant money and any other financial aid a student has. Any remaining balance is deducted from the student loan amount.

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Full Answer

Whatever is leftover from the loan after all expenses are paid goes to the student, who can decide to let the school hold the surplus money to put towards expenses for the next school year. Federal student loans offer low fixed-interest rates, making them much more attractive than private loans from commercial lenders.

A student gets a loan directly from the Department of Education or through a bank or credit union associated with the government's Federal Family Education Loan program. Both of these federally subsidized loan programs offer the same interest rates and have the same criteria for eligibility. All types of student loans must be paid back eventually. Federal student loans do not have to be paid back until the student graduates, leaves school or changes the enrollment status to less than half-time. Many private student loans, with variable interest rates that may go as high as 18 percent, require payments while a student is still in school.

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