Is It OK to Spend Your Financial Aid Refund?

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Updated on Friday, April 30, 2021

Just a few weeks into their college education, some students receive financial aid refunds totaling hundreds or possibly thousands of dollars — the “extra” money from the student’s aid package. Usually, the money comes with little to no information on how students should spend it, or how to return any funds they may not immediately need.

What many students may not realize is the majority of the time, taking any extra money not truly needed to pay for educational expenses results in them owing even more student loan money and making payments over a longer period of time after graduation.

Simply learning about the money and creating a budget could prevent many students from adding to the student loan balance they are already expected to pay back. To get a handle on this, let’s answer the following:

[Note: Some details may have changed due to coronavirus pandemic measures. Read more about relief here.]

What is a financial aid refund?

Your refund is the amount of money left over after all of your scholarships, grants, and federal and private student loans are applied toward tuition, fees and other direct educational expenses for the semester. The refund could come as a lump-sum direct deposit to your bank account, as cash or as a check.

The school legally has to disburse any leftover federal student aid money you are awarded. “[Schools] cannot hold onto that credit balance unless the student gives written consent,” Karen McCarthy, director of policy analysis at the National Association of Student Financial Aid Administrators (NASFAA), told MagnifyMoney. In the case of a PLUS loan, the parent must give consent for the school to hold the credit balance.

Most refunds most likely come from leftover federal student loans, but recipients of some grants may receive a refund for unused funds as well.

While there is no official record of exactly how many college students end up with a positive balance on their account after all of their financial aid package is applied, each semester possibly thousands of U.S. college students in the U.S. find themselves with leftover funding.

The total amount of financial aid that a student is able to receive is up to the institution’s calculated cost of attendance, which is a big part of the math that goes into calculating a student’s financial aid award. Sometimes colleges pad their total cost of attendance estimates to include things that aren’t directly paid to the school, like books, housing, transportation or child care. The idea is that the student will use any leftover funds for other things they need in order to go to school.

“Kids going to a $4,000 community college can walk away with about $5,000 of refunded money,” said college aid expert Joe Orsolini, especially if they find ways to save on expenses like housing.

If you received a refund from a mix of loans, scholarships and grants, examine your refund carefully to understand where it came from and if you’ll have to pay back that money.

Grant and scholarship refunds

Grants and scholarships are usually applied to your institutional bills first. There may be restrictions on how you can use money from these sources, as rules vary widely by state, institution and scholarship program regarding how students are allowed to spend the funds they receive.

Usually the amount of gift aid a student gets is smaller compared with loans they receive and is depleted by direct institutional bills, so most students don’t get that money refunded to them. However, it’s possible for some students who received a large amount of scholarships to be refunded this money.

Student loan refunds

If you receive a refund from unused federal student loan money, you’re free to keep it, but remember you’re still borrowing that money. You will need to pay any federal loan money refunded to you, with interest, starting six to nine months after you graduate.

Generally speaking, you should return any unused loan money that you don’t need right away to avoid taking out more in loans than you really need. But if you need to keep it, make sure you spend the money wisely.

Whatever you do, “don’t go buy a car or go on spring break with [your student loan refund],” Orsolini said. If you’re spending federal loan money, a $10 pizza today at 6.5% APR will cost close to $20 to pay off in 20 years.

Do that math for thousands of dollars in student loans. Make your best effort to limit any flexible, frivolous or impulsive spending so you don’t have to pay that back with interest.

How you handle your student loan refund may also depend on what kind of loan it is — unsubsidized or subsidized.

Subsidized student loans

Interest won’t begin to accrue on subsidized student loan money until six months after you have graduated. So, if you keep your refund, you don’t have to worry about racking up interest charges on the debt you owe while you’re in school.

For that reason Orsolini said that students shouldn’t give back any “extra” subsidized loan money until they are in their last semester of college.

“Until you know for sure that you’ve made it to the finish line, hang on to that money because you never know what is going to happen,” Orsolini said. He recommended placing excess financial aid funds into a 529 college savings account, where it can grow, and you can use the money if you plan to attend graduate school.

If students don’t want to open a 529 account, Orsolini recommended they stash unused subsidized loan money in an emergency savings fund, to help maintain as much flexibility as possible in paying for college.

Orsolini said this method provides a financial safety net for students, as you never know what can happen to your income. If you choose to do this, you should pay back any unused subsidized loan money the month before your graduation to avoid paying interest.

Warning: Orsolini’s method takes a lot of self-restraint.

Unsubsidized student loans

Students shouldn’t pocket any unsubsidized student loan money, as interest will begin to accrue immediately, and keeping the money won’t be worth it.

“Even if you put it in a savings account for a few months, it’s going to accrue more interest as a loan than it would in the savings account,” said Ashley Norwood, a former manager at American Student Assistance (ASA), a nonprofit student loan advocacy group that helps students finance and repay their student loans.

Avoid keeping unneeded unsubsidized loan money at all costs if you can.

If you find yourself keeping the loan because you need to live off of it, Betsy Mayotte, the founder of The Institute of Student Loan Advisors, suggested you do your best to reduce your cost of attendance.

You could make up some or all of the maximum amount a student can receive in unsubsidized loans by getting a part-time job or a work-study job, for example. If cost of living is too high at the school you’re attending, look at a cheaper school or consider moving home if the school is close enough

Should you spend your refund — or return it?

Unless you have restrictions on how you can use it, what you decide to do with your refund money as a college student is really up to you.

“The assumption is that the student is using that credit balance to pay for those [indirectly billed] expenses,” said McCarthy, the NASFAA policy director.

But students don’t always do that.

How one student handled her leftover financial aid

In fall 2009, Brooklyn, N.Y., resident Crystal Chery was just beginning an associate-degree program at Kingsborough Community College. She qualified for the Pell Grant, which covered $5,350 of her tuition and expenses for the school year. After tuition and fees totaling $1,550 were paid, Chery received a credit for about $1,125 to her bank account each semester.

“When I was in college, I remember all of my friends getting True Religions and all of this stuff [with their refund money] … I did not,” said Chery, who lived at home, saving on college housing. “I was focused on other things.”

Chery used her fall semester “refund” to buy equipment to launch a DJ career, starting with a $1,350 MacBook, which she used to create her own mixes and at gigs she booked while in school. With the following semester’s refund, Chery purchased a Canon 60D DSLR camera for another $1,200 because she wanted to “dabble in photography and promote [her business].”

Chery said the investment paid off. After booking larger, professional gigs and gaining some experience, she was able to present work that helped her land an internship with Hollywood, Calif.-based media company, REVOLT TV, where she got to work with big-name music artists like Sean “Diddy” Combs and Damon Dash.

“When I started making these investments, I didn’t know that they were going to alter my career like that,” said Chery, who now hosts and books events with hundreds or thousands in attendance throughout the northeast U.S.

After you’ve allocated funds to different areas of your budget, you need to figure out what to do with any extra funds. If the money is gift aid, meaning you don’t have to pay it back later, you can keep it, but you may need to look into what you are allowed to spend it on, said McCarthy, as there may be restrictions on how you can use scholarship or grant money.

If you think you have enough money for your needs, the experts at ASA and NASFAA agreed that students should immediately send back any money they don’t think they need, since students can always ask for that disbursement again later on.

Giving money back or canceling a federal student loan won’t affect how much financial aid you are offered the following semester and if you need the money later on in the current semester, Mayotte told MagnifyMoney.

“Let’s say you refused all of the loans. You can go back to the financial aid office and ask for part or all of that loan money up to 180 days after the last day of classes,” she added.

As long as you were eligible to receive the student loan funds during that pay period, you can receive a federal loan for a prior or the current payment period without penalty if you ask for it within the 180-day period.

For example, you can technically still receive loan money you denied during the fall semester if you request a late disbursement for that money during your spring semester, as long as it’s within 180 days after the end of the payment period.

Ask yourself these 3 questions before spending (or returning) your refund

Have you paid for all of your nonnegotiable expenses for the semester?

Certain nonnegotiable expenses (read: tuition and fees) are usually billed at the beginning of the semester, but the school won’t send you a bill for everything you can’t succeed without, like technology for classes, a working laptop or sheets for your dorm bed. Here are a few possible spending categories you may or may not include in your budget:

  • Living expenses not billed by the institution
  • Books and other educational supplies you’re going to need over the course of the whole term
  • Transportation (gas, on- and off-campus parking)
  • Child care, if you need this so that you can attend school
  • Miscellaneous personal expenses

Do you need the money to cover other college-related expenses?

There are a host of hidden college costs college-bound families fail to consider for one reason or another, and they can dry an unsuspecting student’s checking account. They are all the little things families don’t think about during move-in, like organization membership fees and paying for food outside of a prepaid student meal plan. If you can’t cover those things with part-time income during the school year, tally up an estimate and keep what loan money you need.

Do you have an emergency fund?

You should have savings, especially if you’re paying for school on your own. You won’t get many opportunities to stash away $1,000 in cash working for minimum wage as a barista in school. Pocketing some of the money now will help you steer clear of rainy days and expensive borrowing options in the future when those hidden costs creep up on you. Set one up ASAP.

How to return your refund to the Department of Education

The rule is simple: Return the loan within 120 days of disbursement, and it will be like you never took it out in the first place.

If you make the 120-day deadline, you’re in the clear. You won’t be required to pay loan fees or any interest already accrued on unsubsidized loans in that time. Sometimes your university can send it back on your behalf, so your first point of contact should be the financial aid office at your institution. Check with them to see if they can send the unused federal student loan funds back on your behalf, or if you will need to send the money back to your loan servicer on your own.

After the deadline, you’ll need to simply make a loan payment back to your loan servicer. You can begin to pay your loans back while still in college. If you do, you won’t pay any interest on subsidized student loan money (it doesn’t begin to accrue until six months after you graduate), but you will pay any loan fees charged to your account.

When will I get my financial aid refund?

If you’re expecting a refund, you aren’t likely to see that money until after the add/drop period for classes — the grace period during which you can change your choices without penalty — ends. That can be about three to four weeks into the semester, although some schools may disburse funds earlier. According to the Department of Education, schools must pay a credit balance directly to a student or parent no more than 14 days after the first day of class or when the balance occurred after the first day of class.

Until then, you’ll have to cover your costs out of pocket.

“Students who are expecting refunds are very anxious for them,” Norwood said.

Norwood added that the anxiety may be because many students who see a refund check come from lower-income families — they may see the money because they qualified for more aid. They may depend on the funds to pay for important costs related to their education such as rent for off-campus housing or educational supplies for classes.

If you missed something on your financial checklist — like signing the master promissory note or completing loan entrance counseling — over the summer, you may see funds even later than four weeks. Overall, if you’re hoping to use refund money to cover your rent or other school expenses, you may need to come up with the cash by other means.

“If [students] don’t budget well for the whole year, it’ll be the same thing in January,” Mayotte said.

There is a silver lining for you if you received Federal Student Aid (FSA). As of July 1, 2016, Title IV schools are required to provide a way for FSA recipients to purchase books and supplies required for the semester by the seventh day of the semester if:

  • The school was able to disburse FSA funds 10 days before the semester began, or
  • The student would have a credit balance after all FSA funds are applied.

The school doesn’t have to write you a check outright for books. Institutions can award the funds in school credit or bookstore credit, too, but must grant you the amount you are expected to spend on educational supplies according to the institution’s calculated cost of attendance by the end of the first week of classes.

Andrew Pentis contributed to this report.