Just like any other loan, student loans are money that is disbursed to a person (student at a college) with a promise to pay it off in the future (with interest).
Where does the money come from?
The US Department of Education is in charge of funding Federal Student Loans (they appoint certain banks for holding the loans). Students who choose this route might be eligible for one or more of the following:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- Direct Consolidation Loans
The other option besides federal loans is Private Student Loans. These are loans funded by private lenders (i.e. credit unions, banks, etc.).
How to receive Federal Student Loans:
Before one is able to actually use borrowed money from the government to pay for school, they must first fill of their FAFSA (Free Application for Federal Student Aid). This document is important for funding college. You’ll need it for scholarships, Pell Grants, and work-study programs that offer financial assistance. The amount of money that is offered to someone is based on things such as how much money the student’s parent/guardian makes annually, how many people are considered part of their house hold, how of those house hold family members are in college at the same time, etc. Once this is calculated, then the student will receive a financial aid letter with which they can choose to accept or deny the package. Also, just like other loans, there will be interest that will have to be payed on the borrowed money. This rate is decided on by Congress each year. Depending on what type of loan it is will determine when the interest on the loan begins. Each year of school, there will be a new loan with an interest rate that is fixed for the term of the loan.