Parents often ask what they can use student loans for, and it’s a question where the correct answer– any qualified expense– isn’t necessarily the right answer. And that’s because of how student loans work.

Student loans have three phases: disbursement, deferment and repayment. The rules for each phase can limit what you actually use the loan for.

Disbursement: student loans are disbursed directly to the school.* Before disbursing funds, the lender contacts the school to verify the student’s attendance. Funds are then sent to the school and applied to the student’s outstanding direct-billed balance– tuition, fees, and any room and board costs billed directly by the school. Only if loan funds remain after all direct costs are paid are they disbursed to the student. So, you may be planning that your loan gets used for rent or books, but the college might take the money first.

An important consideration for students intending to use loan proceeds for non-direct billed costs this year: while the standard pipeline for federal student loans appears to be working fine despite significant staffing reductions at the Department of Education, families with any wrinkle in their file — verification, dependency overrides, professional judgment appeals — should build in extra lead time and follow up proactively with their school’s financial aid office rather than assuming issues will resolve themselves such that loans are disbursed on time.

Loans are allocated across academic terms. That means that a first-year student at a college with semesters will have $2,750 disbursed each semester.

Here’s an important point: If your financial aid award includes loans and you accept the award as is, all the loans will be disbursed to the school. This could include both federal direct student loans and Parent PLUS loans. If you do not intend to take out all those loans, you must decline them.

Deferment: Federal student loans (and most private loans) are deferred while the student is in school and for a 6-month grace period following graduation. While in deferment, loans accrue interest unless they are subsidized. (Subsidized loans may be a portion of the student’s federal loan package, based on financial need.) After four years and the grace period, the balance on a $5,500 unsubsidized student loan taken out for the 2026-27 school year will be a little over $7,000 when the loan goes into repayment, assuming no payments have been made.

The grace period also applies if you leave school or drop below full-time attendance: after 6 months, you’ll need to start making payments.

The grace period is a great time to research repayment options. It’s also a good time to reach out to your loan servicer to ensure that they have your correct address and contact info, since your first payment will be due sometime around 6 months after graduation, whether or not the servicer has your correct contact info.

While no payments are required during deferment, borrowers do get a big leg up on repayment by making any payments they can during this period, as these payments result in dollar-for-dollar reductions in the loan balance, versus the combined interest and principal payments during repayment.

Repayment: Repayment begins at the end of the 6-month grace period. At this point, all accrued interest is capitalized, or added to the loan balance, and the monthly payment is calculated based on that balance. Those borrowing for the first time this year will have 2 repayment plan choices:

  • Tiered Standard: This is the default option. Depending on the total loan balance, borrowers will have from 10 to 25 years to repay their loans. Due to federal loan limits, most undergraduate borrowers will have 10- or 15-year repayment terms.
  • Repayment Assistance Plan (RAP): This is an income-based repayment option where payments are calculated annually based on the borrower’s income, tax filing status and household size. Loan balances are forgiven after 30 years if they have not been fully repaid.

* All federal and most private loans are disbursed directly to the school. If you want a loan disbursed directly to you or your student, make sure to include that in your search criteria as you look for private loans.