The life cycle of a loan is described below to help you understand the loan process. The life cycle has six phases and a number of steps in each phase - from applying for financial aid to paying off the loan. For a high school senior, this process could span over 15 years or more.
The following describes the typical life cycle of federal student loans, including loans made by the U.S. Department of Education (ED) under the Direct Loan Program, and Federal Perkins loans, which are administered by participating schools.
Phase 1: Applying for Aid
Student and parents:
- Complete and submit the Free Application for Federal Student Aid (FAFSA). This form is your starting point for applying for most student financial aid programs and will help determine your eligibility.
- After you apply, you will be sent a Student Aid Report (SAR). Your SAR will summarize the information you provided on the FAFSA and indicate your Expected Family Contribution (EFC). Review this report to ensure all information is correct. The school(s) you list on your FAFSA will get your SAR electronically.
- If you're eligible, each school's financial aid office will send you an award letter displaying the types of aid and amounts the school will offer you.
- Review and compare financial aid award letters received from schools.
- Once you accept a school's award letter, sign and return to the school for processing.
- If you choose to take out one or more loans, you will then have to sign a promissory note, a binding legal document that lists the conditions under which you're borrowing and the terms under which you agree to repay your loan(s). This is provided by the school or by ED.
- A credit check may be required (e.g., for PLUS).
Phase 2: Disbursement
- ED sends loan proceeds to school by check or electronic funds transfer.
- School may contact borrower for check endorsement.
- School applies loan proceeds to student's outstanding bill and provides any remaining funds to borrower.
Phase 3: In School
- Student attends school. Student borrower is not required to make federal loan payments during this time.
- With Direct Subsidized Loans, accrued interest on loan during this period is paid by the federal government (interest subsidy).
- With Direct Unsubsidized Loans and certain other federal loan programs, including Direct PLUS Loans for graduates, the borrower is charged the interest that accrues during this time. If the borrower does not make interest payments while in school, it is added to the principal loan balance upon entering repayment.
- Direct PLUS parent borrowers have the ability to request deferral of payments for a period that covers the entire time a student is enrolled at least half-time, as well as for the six-month period after the student graduates, withdraws or drops below half-time enrollment. If a Direct PLUS Loan for Parents borrower chooses not to defer, payments will begin within 60 days after the full disbursement of the loan.
Phase 4: Grace/Separation Period
- Student graduates, enrolls for less than half time, or withdraws.
- Student borrower receives a "grace period" of 6-9 months (depending on the type of federal loan) or deferment before payments are required.
- Borrower receives a repayment disclosure statement detailing the date payments must start, monthly payment amount, number of payments, and interest rate for the student loan(s).
- Deferred PLUS borrower receives a revised repayment term notice at the end of the deferment.
Phase 5: Repayment
- Student begins repaying federal loans when the grace period ends.
- As described above, Direct PLUS Loan for Parents borrowers will be scheduled to begin making payments immediately after full disbursement unless the borrower elects an in-school deferral option. This deferment allows the borrower to defer payments throughout the in-school period and for an additional six months after graduation (or after student drops below half-time enrollment.) During the deferment, the borrower can elect to be billed for the accruing interest or have the interest accrue and be capitalized at the beginning of repayment. For borrowers who elect to begin making payments upon full disbursement, the initial monthly payment will be due within 60 days of the final disbursement.
Phase 6: Paid in Full
- Borrower makes final loan payment.
- Notice is sent to borrower confirming loan is paid in full.
- Credit bureaus are notified that borrower has fully repaid the loan.