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How Student Loans Work: What If Your Child Drops Out?

 

To understand how student loans work, you must view them like any other type of debt obligation. A vast majority of students have educational loans, but very few of them or their parents know all the facts about them. A student that leaves or drops out of school may have to repay all or some of the borrowed funds.

Student Loan Basics

There are two types of student loans: public and private. Public loans are provided by the government, while private loans are provided by a lending institution, such as a bank. Both types of loans require repayment. Public loans differ only by having a lower interest rate.

Generally, loan money is sent directly to your student's school or college. The school deducts the amount of tuition and remits the remainder to your student to provide her with money for books and living expenses. If your child only took out loans to pay for tuition, she will not receive any money. Loan payments are sent to the school at the beginning of each semester. This process, therefore, will be repeated every semester your child is in school.

Student loan payments typically begin six months after your child's graduation. The amount of payments will be determined by the amount and length of the loan and the repayment plan your child chooses. Payments are usually due monthly and include principle and interest. Most school loans have 30-year repayment schedules.

Student Loans and Dropping out of School

A student that drops out of school must still repay her loans. The amount of repayment depends on when your child dropped out, how much of the loan money she spent on her living expenses and whether any portion of the loan is returned to the lending institution.

If your child left school at the end of a semester, she will be responsible for paying for the entire amount of money spent. The next semester's loan payments will not be sent to the school, so your child will not have to pay for those loans. Loans obtained up to the time of her leaving school will need to be repaid.

If your child left school in the middle of a semester, she will have to repay for any money not returned to the lending institution. Therefore, if your child returns any unused living expense funds and the school returns a portion of her tuition payment, your student will not have to repay those amounts. However, she will still have to pay for the interest on those loans for the period between when they were sent and when they were returned.

The timeframe for repayment will differ depending on the loan agreement. Some lending institutions provide students who drop out of school the same six month grace period before requiring repayment. However, some institutions require that payments be made immediately after the student drops out of school. While a school may inform the lending institution that the student has left school, the student should also provide this information to avoid being held delinquent in her payments.

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