Have you borrowed more than you need and are wondering what happens to unused student loan money? You may or may not be able to return the excess amount without paying interest or fees depending on your lender and type of loan. Let’s walk through the different scenarios.
Flickr user Penn State
Why You May Have Unused Student Loan Money
Students often end up borrowing too much or too little as it’s not always possible to calculate exactly how much they need. Tuition fees are generally the only fixed college cost. The cost of everything else, from accommodation and food to textbooks and school supplies, varies depending on what you need and choose. This makes it difficult to determine exactly how much you need at the beginning of the year.
If you borrow too little, you will have to find other ways to raise the additional funds you need. If you borrow more than you need, you’ll pay interest on the extra money unnecessarily. To reduce your debt, let’s learn how to return unused student loan money as early as possible.
How To Return Unused Federal Student Loan Money
When you borrow too much, the excess amount appears as a credit in your student loan account. You can use those funds to cover other education-related expenses. If you still have money left over, it’s best to return it to the Department of Education to reduce your student loan debt.
The federal government makes it relatively easy to return unused funds. The formalities, process, and fees differ depending on when you submit your request.
If you return unused federal student loan funds within 14 – 30 days after disbursement
You won’t pay any interest or fees on the returned amount. The process is straightforward too. Just notify your school’s financial aid office that you want to return all or some of the unused money. Colleges are required to process the request on your behalf and return the excess money to the federal government if the request is submitted within 14-30 days. Some schools may have a different timeline, which is usually mentioned in the loan cancellation rights letter that they send you.
If you return unused federal student loan funds within 31 – 120 days after disbursement
Interest and fees will be waived on the returned amount but the process may be a little different. Schools are not required to process the request if it is made 31-120 days after disbursement. If your college won’t handle it, you’ll need to contact your loan servicer and find out the formalities. Log in to your Federal Student Aid account to find out who your loan servicer is for that student loan.
If you return unused federal student loan funds 121 days after disbursement
Unfortunately, you cannot cancel or return unused federal student loan money if 121 days have passed since disbursement. The only option, in this case, is to use that money to pay back your loan early. You’ll need to contact your loan servicer as schools cannot process these requests. Send them a written request asking them to apply the excess funds to your principal balance. You will have to pay the fees as well as any interest that accrued while the funds were in your account.
It’s a good idea to contact your school’s financial aid office as soon as you decide to return the unused loan money. They process the cancellation if they can or point you in the right direction if they can’t.
How To Return Unused Private Student Loan Money
Whether you can return unused private student loan money depends entirely on your lender. Private lenders set their own terms, conditions, and fees for returning unused funds.
Before signing a loan agreement with any private lender, ask about the process for returning unused student loan funds. Private school loans have to be first certified by your school before they are disbursed. You have a right to cancel your loan during that in-between period.
If that period has passed and the loan has been disbursed, you’ll need to ask your lender about the protocol. In most cases, they you will be able to return the excess funds. However, you will have to pay interest on that amount for the time that you had the money. Although rare, some lenders will waive any interest if you return the unused funds within 120 days of receiving the money.
Should You Return Unused Funds?
In most cases yes, it’s smart to return unused student loan money and the sooner you submit the request, the better. Most lenders, federal and private, will waive the interest and fees when funds are returned shortly after disbursement.
Even if the lender won’t waive the interest, it’s still advisable to return the excess funds. This reduces the accrued interest over time, lowering the total cost of the loan.
Consider keeping the excess money only if you need it to pay for other education-related expenses such as a laptop, textbooks, or a travel pass. The Federal Student Aid Handbook has the complete list of qualified educational expenses that you can use the funds towards.
Avoid This Tempting Mistake!
It’s tempting to think of the excess money as a bonus and spend it on luxuries such as a vacation, eating out, or renting an expensive place. This is an expensive mistake and one that will cost you dearly in the long run, in terms of accrued interest. Also, many lenders have a clause in the agreement prohibiting the use of student loans toward these expenses.
If you do have unused student loan money, spend it wisely for education expenses or return it as soon as possible to reduce your debt.
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