When you take out student loans, the money is generally sent directly to the financial aid office at your school. Tuition, fees, and room and board are taken from the funds that lenders send over. But in some cases, your lenders will have provided more money than the total you owe to your school. This is likely to happen if you’re living off campus and borrowed for living expenses, if you received a last-minute scholarship that covered some costs, or if you borrowed more than necessary to cover the basics. When the school winds up with leftover loan funds, what happens to unused student loan money? The answer is up to you. Any money that isn’t immediately used to cover school expenses will be distributed to you in a financial aid disbursement. You’ll have to decide what to do with extra student loan money your school gives back to you, and it’s important to make informed choices about how to handle the leftover student loan money. Here’s how you can use your student loan leftovers to make the greatest financial gains:
Return the extra student loan money to your lender
When you’re trying to decide what to do with extra student loan money, your best option is usually going to be sending the money directly back to your lender. You can do this by making a lump sum payment on your outstanding student loan balance. Returning the extra money will reduce your outstanding amount due, which means you won’t have to pay back as much money later on. Returning the money will also reduce the interest that you owe on your student loans. With any student loan that you take out — except for Subsidized Direct Loans — interest starts accruing on the loan immediately after you have borrowed. If you immediately use your leftover student loan money to pay back part of your loan, you will be charged interest on a smaller balance. You will thus accrue less interest and end up with less to repay upon graduation. For this reason, there’s almost no downside to using the student loan money left over to pay back your lender. That’s because there’s no prepayment penalty on federal student loans and most private loans will not charge a prepayment penalty either. You can pay as much extra as you want toward your loan at any time — including sending back the entire loan balance.
Pay other educational costs with the extra student loan money
If you have other qualifying educational expenses to pay, you can use the student loan money left over to cover these costs. However, when you’re deciding what happens to unused student loan money, remember that you have an agreement with your lender to pay only certain expenses with the funds. These allowable expenses include:
- Tuition
- School fees
- Room and board
- Books
- School supplies
- Equipment, such as a personal laptop
- Transportation
- Child care expenses
If you use the extra student loan money for anything outside of your agreement with your lender, this could be considered misuse of the funds and you could face legal repercussions. This means that while you’re deciding what to do with extra student loan money, you’ll want to avoid considering options such as paying for spring break trips or other luxuries that aren’t allowed by your loan agreement. You do have the option to use the extra student loan money to cover tuition costs in later semesters. But remember, the interest on your student loan starts accruing right away. So if you take a loan now and use it for a future semester, you’d end up paying at least one extra semester of interest needlessly. In most cases, you’d be better off returning the spare funds and borrowing for future semesters later to avoid unnecessarily paying more interest charges.
Making the right choices when deciding what to do with extra student loan money
While it may be tempting to consider fun options like taking a vacation with student loan money, it’s always important to keep in mind two things. You must consider your loan agreement with your lender as well as the fact that you must pay back these loans after graduation. After considering both the limits your lender imposes and the fact that a larger loan balance will result in higher payments after graduation, you may decide the single best thing to do with your extra student loan money is to send it back to the lender as soon as possible once your school distributes it to you.
