Possibly one of the biggest regrets many graduates with student loans have is how they spent their student loan refund. A student loan refund is the portion of the loan remaining after total costs (tuition, fees, etc.) have been deducted.1 The remaining balance is then refunded to the student in the form of a check, usually at the start of a semester.
Refund checks can be issued for thousands of dollars; and all too often, students feel this money is theirs to use as they please. The reality, of course, isn’t so sweet. Student loan refunds are not “free” money; they are part of the student loan, and will be included in the total amount of debt accruing interest. When the time comes to repay their debt, students may wish they hadn’t accepted their loan refund check or had at least been a little wiser in terms of how they spent it.
In fact, according to Forbes, “The universal regret most college graduates with federal student loan debt have is how they spent their student loan refund checks.” While student loan refinancing is one helpful way to manage your bills (and combat past unwise spending decisions) after graduation, knowing how to correctly manage your refund will help you avoid an unpleasant situation in the future, and is a step in the right direction before your loans even come due.
Why You Receive a Student Loan Refund
Your total student loan amount depends on your total costs. In short, after you’ve filed your FAFSA, and had your credit (and possibly the credit of your parents or cosigner) checked, the financial aid office at your school considers your enrollment status, the cost of attendance, and your expected family contribution. They subtract this expected contribution from the cost of attendance, and determine how much need-based aid you are eligible to receive. To assess non-need based aid, the school takes your cost of attendance and subtracts any financial aid you’ve already been awarded.2 The size of the loan you qualify for takes a lot of factors into account, and ultimately it is difficult to come up with a number that precisely matches your need. That makes it easy for your loan to exceed your actual expenses, and result in a refund. As mentioned in a previous article discussing student loan refunds, funding on your account comes from a combination of sources including financial aid, scholarships, student loans, and cash payments. This means that a refund results from a surplus in all sources of aid, including both federal and private student loans.
As students progress in college, financial status and aid packages are bound to change. For example, there are a myriad of scholarships or grants available that might be able to offset tuition costs, or maybe a generous relative is willing to cover a portion of your living expenses for a semester or two. A student’s lifestyle in their second year might differ from freshman year – electing a new meal plan, cheaper student housing, etc. – which in turn can lower overall costs. These are all ways that your student loan sum might exceed your actual costs as a student. The money that is leftover from your student loans is then returned to you in the form of a student loan refund check.
Calculating Your Own Student Loan Needs
It’s important to calculate your own student loan needs for yourself, so as to have a firm understanding of your requirements and budget plan. The first step to doing so is assessing your annual costs. These include tuition and fees, housing and living expenses, books and supplies you may need and more. Then determine how much money you have to spend towards these costs based on your savings, family contributions and income. Once you’ve determined this, you will be able to gauge your funding gap. In turn, your funding gap will help you estimate the amount you will need to borrow via loans, to cover the expenses your own money can’t. Using a student loan calculator is a great way to get started and broadly determine the loans you will need.
Having a budget through your college years is vital to keep track of how much you have and how much you owe. This budget should be dynamic – adapting with changes each year might bring. As we noted above, a student’s lifestyle may change drastically as they progress through college – be it through reduced housing costs, increased family contributions, or even smaller saving measures such as reusing textbooks and supplies. In turn, these changes could result that you needed to borrow less than what you did initially, and even repay some of your student debt or pay down any interest you may be accruing. It’s important to have a budget and plan your refund in advance, so that you can effectively calculate how much you need to borrow. Planning ahead helps build financial literacy, and makes you better prepares both for unplanned expenses and responsible management of sudden windfall. In the future, if you need to pay back your loans or work with a refinancing lender to reduce your debt, you’ll be that much more financially prepared.
Common Mistakes to Avoid with Your Refund Check
There are plenty of stories about students who used their refund money to go on lavish spring break trips, buy cars, or otherwise spend the money on things that were not a necessity. Take the example of John Smith, a University of Oregon graduate, who is now 46 years old.2 His student loan refund afforded him a lifestyle of extravagance, but when he graduated in 1997, his student loan payments were $1,400 per month. This was double his rent, and to top it off, he was unemployed.3 Ultimately, accepting your student loan refund without thinking about the potential future financial implications will lead to debt piling up. Refinancing can help mitigate the interest and time it takes to pay all this back, but it can’t undo those poor spending decisions. The less you borrow as a student, the less you will have to repay after you graduate.
Obviously, a student loan refund can provide a student with a significant amount of spending money. Sometimes this means that students decide not to work while going to school as they already have a source of cash.
Skipping part time work opportunities due to the convenience of having easy access to borrowed money is an unfortunate side effect of thinking about your loan award as free money, rather than borrowed money.4 When you first accept your student loan, it may not take into account your earning potential as a student. College campuses often have many work-study opportunities, paid internships, other on-campus income opportunities. These can all be way to help pay for school as well as gain meaningful, real world work-experience, and expand your professional network, all while reducing your dependence on student loans. A refund check in addition to this hard work isn’t a bonus or a reason to quit. Rather, it should act as a means to borrow less or pay upfront instead of borrowing.
The Benefits of Returning Your Refund
So what can you do if you don’t want to risk the potential negative effects that might result from accepting your student loan refund? Even though it’s an option not often utilized, you can return your refund check.1 If you aren’t in desperate need for money, sending back your refund is a very wise decision. Returning your student loan refund check to the Department of Education means that you are lowering your overall loan debt. The excess amount is deducted from your financial aid package, thus removing your responsibility to repay it post graduation.
Essentially, by returning your refund check, you have repaid that amount of your loan immediately. Your student loan refund check should have instructions on how to go about this process. In the long term, choosing to return your student loan refund is extremely beneficial as it reduces the amount of your loan that accrues interest, leaving you with a smaller debt to pay back later on.
For those who feel the need to accept their refund check, know that there are better ways to spend this money rather than splurging on non-necessities in college. Your aim with spending the student loan refund should be to cover education related expenses that haven’t already been paid. For example, you could use your refund to cover buying extra research materials you might need to complete specific projects.
Try and stick to a budget in college — it will go a long way toward helping you keep perspective on your expenses and future debt obligations. Our article on how to save money while you’re in college gives some easy to implement ideas that can help you stretch your budget even further. Budgeting is a good habit, so you know how to navigate repayment and possibly refinancing once you graduate. When you understand how loans and interest work, you are that much better prepared for the future. Another good way to utilize your student loan refund upon acceptance is to save it. Using leftover refund money, you can calculate the student loan you actually need and borrow less the following semester, or keep the refund money on standby in case of emergency.
No matter how you spend your student loan refund, it is important to remember that you will have to pay this amount back eventually, with interest.
After weighing the positives and negatives, it may seem as though the most sound decision would be to return your student loan refund. However, we do recognize that sometimes you might be in need of money and won’t be able to afford to return the refund. In these cases, it is advisable to accept your student loan refund, but be extremely prudent in how you spend it.