Student loans are designed to help you cover qualified education expenses, like tuition, fees and on-campus housing. Once the school applies the loan proceeds to your tuition bill, it's possible that you could receive what is commonly referred to as a "student loan refund."
A student would receive a refund check from their student loan if, after all tuition, housing and fees are taken out, there's a remaining balance says David Bakke, personal finance expert for Money Crashers, a financial management website.
But what do you do with this financial windfall? If you're expecting a student loan refund, here's what you need to know.
Why Students Get a Refund
A student loan refund most often happens if you're borrowing money to help cover college costs beyond tuition, fees and housing. For instance, you might need funds to pay for textbooks, to purchase a new laptop or for other education expenses.
That's useful if you don't have savings readily available that you can use for those expenses. Using a student loan refund to cover these expenses can keep you from having to rely on a credit card or personal loan that might carry a higher rate. If you get a refund keep in mind that it's not free money.
Interest will continue to accrue even if you aren't making payments, and it will be added to your loan balance once you enter repayment.
Spend Student Loan Refunds Wisely
The biggest mistake you can make with your student loan refund is using the money to pay for anything other than costs related to education expenses, Bakke says.
"The money shouldn't be used to travel or make big purchases," Bakke says, "because when you spend that money, you're unnecessarily raising your overall level of student loan debt."
Sarah Brumley, founder of the family finance blog Lemon Blessings, routinely received $1,500 to $3,000 back each semester while in college. Rather than keeping it, she opted to give it back to avoid incurring additional student loan debt. So if you end up with more money than you really need, then talk to your school or lender to find out how to give it back. Lenders know this situation happens and many give you a period of time to return the funds without charging you interest. This time frame varies, so check the requirements sooner than later.
"Whenever possible, students should use their refund check to pay back as much of their loan as possible," Brumley says. "This prevents the accumulation of interest and the temptation to simply spend it down the line."
Pinpoint Your True Borrowing Needs
If you require a student loan refund to help pay for books, supplies and living expenses and other required spending, take time to figure out exactly how much you'll need.
Brumley says to use your financial aid award letter if you have one or to contact your school's financial aid office to get a list of the current semester's charges for tuition, fees and on-campus housing to estimate what you need to borrow. You'll also need to factor in the cost of books, which may be less predictable from one semester to the next. There are loan amount calculators available to help crunch the numbers.
Keep a Student Loan Refund in Perspective
If you're getting a student loan refund, the right mindset can help you avoid any major mistakes.
"Understand that you borrowed the money to attend school," Bakke says. "Don't be tempted to spend it on anything else."
The money is meant for qualified college expenses, so if you end up not needing all of it, you should return the funds. And the sooner you can start making payments, you will help offset the interest that accrues. Making in-school payments — even as little as $25 a month — will help reduce the cost of your loan.