Who likes getting a big, fat check in the mail? Everyone! Who enjoys the rapid accumulation of interest charges and student loan debt? No one.
It is at the intersection of these two financial events that we find the student loan refund.
What is a Student Loan Refund?
When the amount of financial aid you’ve borrowed exceeds the amount needed for tuition and fees (once all forms of assistance have been tallied, including grants and scholarships), the student may receive a student loan refund for the overage to help with additional educational expenses.
Since this can be a substantial amount and refunds usually arrive at the start of a semester, it might be tempting to run out and spend it. There are valid ways to do so, but remember that a student loan refund is still part of your student loan. This means the money is subject to interest charges.
With that in mind, let’s explore some dos and don’ts for how to use your student loan refund wisely.
DO: Treat Your Education
One of the most legitimate academic-related expenses at the start of a semester is textbooks and supplies. These can be surprisingly costly, so if used versions are available, by all means, buy them. Just be sure the version you get isn’t so old it’s no longer used with your professor’s lesson plan.
Ancillary education-related expenses are also smart ways to use your refund. Depending upon your class or elective schedule, you could find yourself in need of special equipment, software, or lab fees. If you live off-campus, you probably have rent and parking fees.
It bears repeating that student loan refund money – no matter how wisely spent – accumulates interest, so keep costs down where you can. Maybe think about supplementing with a part-time job if it doesn’t distract from your studies.
DON’T: Treat Yourself and Your Friends
When you picture paying off Spring Break for the rest of your life, the phrase “trip of a lifetime” takes on a whole new meaning.
No matter how justified you feel in rewarding yourself for a long study stretch or a well-earned grade, you will likely come to regret spending your student loan refund check on something frivolous. A brand-new TV or a pair of expensive boots will be obsolete by the time your first loan bill arrives. Worse, if your bills become too high for you to meet, your credit could be negatively affected.
The first thing you should do with your student loan refund check is pause and consider if the way you want to spend it truly contributes to your academic success.
MAYBE: Treat Your Savings
What if you spill coffee on your laptop during a late-night study session? What if your car breaks down or gets towed? A lot of life’s surprises come with a price tag, so if you have the discipline to deposit your refund check into an account where you’ll resist tapping into it, it might help you rest (and study) a bit easier knowing it’s there.
If you don’t end up needing the money, you can always put it toward paying down your loan at the end of the semester. You can also use it the following year, which could help you avoid taking out future student loans. Put yourself in an even better financial position by paying off the interest accumulated during the time you held the money.
DEFINITELY: Treat Your Financial Future
By far the safest option for your financial health is to pay back any leftover funds right away. Student loans can take years to pay off and the less you borrow, the less you’ll owe.
In rare circumstances, spending your student loan refund check on existing debt might be an option. For example, if your existing student loan debt is at a higher interest rate, using the refund to pay down that debt means the money will – in the long run – cost you less than if you kept your existing student loan.
Perhaps the best use of your student loan refund check is to build good money habits from the start. When it comes to investments, a higher education is one of the best you’ll make, so why not maximize it with a clear understanding of how what, and why you spend?
Student loans are meant to help cover education-related expenses only and you’ll thank yourself later when your smart choices pay off.