The process of getting a student loan sanctioned is tough and tedious. More often than not students end up borrowing more money than they need. This happens due to a number of reasons including last-minute changes in accommodation and scholarships. However, the main question at this stage is, what should be done with the unused student loan money? If you are also a student who has questions regarding the leftover student loan money then worry not. This post will help you understand everything related to unused student loan money.
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Why You Might Have Unused Student Loan Money In The First Place?
Before analysing what are the options for utilising the unused student loans, let’s quickly see why you may have this sum in the first place. The answer to this lies in the disbursement process of student loans.
Federal student loans are sent directly to your school. This is done typically via two disbursements during the academic year. Then the school applies the loan amount to your most essential academic expenses that include tuition, fees, and room and board. The remaining sum (often called a credit balance) will usually be forwarded to you via check, direct deposit or a school debit account.
The student loan disbursement process is very similar to private student loans. Lenders rarely send funds directly to you. The loan amount is disbursed directly to your school. After all, your lender needs your school to verify that you’re legitimately enrolled over there and not attempting to borrow more than your cost of attendance.
You could, however, end up with leftover funds from your college loans in the following cases:
- Last moment changes lead to you living off-campus, and your school refunds you for on-campus housing costs.
- It is possible that you miscalculated your expenses for the year and borrowed more money in student loans than you actually need.
- Luckily you scored a last-minute scholarship that made part of your loan amount unnecessary.
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What Happens If You Have Leftover Student Loan Money?
If at all you end up having unused student loan money then you have two major options in front of you.
- Either you can return the leftover money to the bank/lender to reduce the amount you owe (The college financial aid office can help you in this process)
- You could keep the leftover student loan money.
Let’s analyse both cases in greater detail.
Unused Student Loans? Here’s the Smart Thing to Do
Of the above-listed two options, the first one is the smartest thing to do with your unused student loan money. Read on to know how and why.
Can You Return Your Unused Student Loans?
The answer is a big YES. The additional ‘big’ comes because it is also the most advisable and wisest thing to do.
Here are the benefits of returning your unused student loan money.
No Prepayment Penalties
Nothing prevents you from paying off the debt early; not even the laws. Federal and private student loans do not have prepayment penalties. This includes repaying all or a portion of your student loan while you are still in college or during the grace period. Now if this doesn’t sound appealing to you then read the second benefit.
Impact On Interest
The federal government is responsible for paying the interest on subsidised loans during the in-school and grace periods. Hence, no interest is owed on subsidised loans if you return them by the end of the grace period. Now that saves you a colossal sum of money. Do note that you should prefer to return unsubsidised loans over subsidised loans since the former doesn’t have this interest benefit.
If you return the unsubsidised federal loans within 120 days of disbursement, you will not owe any interest on the loans. After 120 days, you will owe the interest that accrued on the loans since they were initially disbursed, but it is usually a small amount.
On private student loans, interest accrues from the date of disbursement and must be paid even if you return the loans. So returning them as soon as possible minimises the interest you have to pay and helps you complete your education with lesser debts.
How To Return Unused Student Loan Funds
To return your unused student loan money, all you need to do is contact your school’s financial aid office within 14 days of receiving the notice that your loans are being disbursed. The office will assist you in returning the funds.
Keeping The Unused Student Loan Money
You do have the option of keeping the leftover student loan money as well instead of sending the money back. This could be invested for present extra educational needs or could be utilised for the next academic term.
But, it is better to return the money if the loan is an unsubsidised federal loan or a private student loan like mentioned above. Returning the money will reduce the amount of interest charged on the debt.
Even if you keep the money, make it a point to utilise it for something that adds value in the long run. Don’t spend it on a summer trip or a weekend party. Since, if you blow away the money at this stage, you will pay the same amount and a significant interest on the same from your first paycheque. Minimising the debt at every stage is the identity of a financial literate.
Final Words | Utilising The Unused Student Loan Money
In order to avoid borrowing more than you need to prepare an accurate budget. Make a budget that lists all of your college costs, including tuition fees, meal plans, housing, textbooks, supplies, equipment, transportation and miscellaneous expenses. Also, consider hidden college costs, which can add $300 to $500 per month.
FAQs
Q1) Can I return an unused student loan?
Ans- Yes, you can return unused student loan money to your lender, though timing and loan type could determine how much it will cost you.
Q2) What else can I do with unused student loan money?
Ans- You can cover your other school related expenses from the unused student loan.
Q3) Will I owe interest or loan fees if I return unneeded loan funds?
Ans- Generally no interest or loan fees are charged on student loans that are returned (whether by the borrower or the school) within 120 days of loan disbursement.
Q4) Can I request a reduction in my loan amount if I don’t need it all?
Ans- Yes, in some cases, you may be able to request a reduction in your loan amount before the funds are disbursed to your account.
Q5) Can I use unused loan funds to pay off other debts?
Ans- It is generally not recommended to use student loan funds to pay off other debts, as this may lead to financial complications and potential penalties.
Thank you for reading this blog ‘What Happens To Unused Student Loan Money’. If you enjoyed reading this blog and would like to continue reading more about student loans then do check out our following blogs.
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