Loan Life Cycle

The life cycle of a loan is described below to help you understand the loan process. The life cycle has seven 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.

The following describes the typical life cycle of a federal student loan.

Phase 1: Identifying Need

Student and parents:

• Complete and submit the Free Application for Federal Student Aid (FAFSA). This form will help determine your eligibility.
• Review the Student Aid Report (SAR). Your SAR will summarize the information you provided on the FAFSA and indicates your Expected Family Contribution (EFC).
• Compare financial aid award letters received from schools.

Phase 2: Loan Application

• Borrower requests loan by submitting a loan application.
• School certifies student eligibility.
• Lender approves borrower loan application.
• In the case of FFELP loans, a guarantor provides guarantee that the loan will be repaid.

Phase 3: Disbursement

• Lender sends loan proceeds to the school by check or electronic funds transfer.
• School may contact borrower for check endorsement.
• School applies loan proceeds to student's outstanding bill and turns over any remaining funds to borrower.
• Under most federal loan programs, loan proceeds are not disbursed to first-year undergraduates who are also first-time borrowers until the student completes the first 30 days of their program of study and participates in entrance counseling.
• Lender sends parent borrower a repayment disclosure statement for Federal PLUS loan.
• Parent borrower with Federal PLUS loans begins repayment after full disbursement. Normally, the first payment is due no later than 60 days after disbursement. However, an in-school deferment may be an option.
• For loans requiring credit, lender notifies credit bureaus that loan proceeds have been disbursed.

Phase 4: In School

• Student attends school. Student borrower is not required to make federal loan payments during this time.
• Under some federal loan programs, accrued interest on loan during this period is paid by the federal government (interest subsidy).
• Under other programs, the borrower is responsible for paying the interest that accrues while the student is in school. If the borrower does not make interest payments, it is added to the loan balance
• Student borrowers who have Federal Stafford or Federal Perkins loans are considered "in-school" unless they are enrolled less than half-time, graduate, or withdraw.
• Parent borrowers with one or more Federal PLUS loans do not have an "in-school" phase.

Phase 5: Grace 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) before repayment of any federal loan begins.
• Parent borrowers do not receive a "grace period" with Federal PLUS loans. Borrowers of private loans may or may not receive a "grace period."
• Lender sends student borrower a repayment disclosure statement detailing the date payments must start, monthly payment amount, number of payments, and interest rate for the student loan(s).

Phase 6: Repayment

• Student begins repaying Federal Stafford or Federal Perkins loans when the grace period ends.
• Parent begins repaying Federal PLUS loans immediately after full disbursement and must make initial payment within 60 days of disbursement.
• Student and/or parent begin repaying private loans according to the terms of the loan.
• For federal loans, you may switch from one repayment plan to another once a year as long as the maximum loan term for the new plan is longer than the amount of time left under the current plan.

Phase 7: Paid in Full

• Borrower makes final loan payment.
• Lender sends notice to borrower confirming loan is paid in full.
• Lender notifies credit bureaus that borrower has fully repaid the loan.