We know it’s tempting – it’s the beginning of a new semester and your student aid “refund” has just been deposited into your checking account. You think of how easy it could be to use that money to splurge on all of the things you’ve been wanting – a nicer cell phone, new clothes, or the spring break trip you’ve been daydreaming about. But, before you make these dreams a reality, stop and reconsider what you’re about to do. The “refund” is NOT FREE MONEY!
Oftentimes, student aid “refunds” are only disbursed to students because they’ve received more in student loan money than they need to pay directly to their college or university for that semester.
What does this actually mean? The money that you’re receiving is most likely money that you’ll have to pay back after graduation - with interest. That said, accepting only the loan money that you need to pay for your educational expenses can greatly reduce the debt you’ll have to pay back. It's simple math, really: the less you borrow, the less you owe.
Using the calculator provided by studentloans.gov, you can explore the various scenarios for repayment. In some cases, it’s possible to reduce the amount of interest you’re paying by nearly half simply by not accepting your entire refund each semester.
Outside of any financial consequences of spending money on things you don’t truly need, there are also regulations that govern how you’re allowed to spend your student loan money. Federal student loan money can only be used for educational expenses at the school that awarded your loan – this includes tuition, room and board, fees, books, supplies, equipment, dependent child care, transportation and rental/purchase of a personal computer. Notice that new flat screen TVs or trips aren’t mentioned.
In the end, responsibly managing your financial aid refund gives you control over your debt and pays off in the long run. Come up with a realistic budget to see what allowable costs you’ll have during a semester. Then, talk to the financial aid office at your school for information on how to return any extra money and reduce the amount of your loans. Trust us – your wallet will thank you.
Find more money management tips and resources on our WalletWorks page.
