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What Happens to Unused Student Loans

Sometimes, students borrow more in student loans than they need to fund their education. Students in this situation may wonder “what happens if I don’t use all of my student loan?” In most cases, colleges will refund the money to the student. Continue reading to learn more about what happens to unused student loans so you avoid taking only what you need to be a successful student. 

Also see: How to apply for student loans: federal and private

Direct and indirect costs

When students borrow loans, the amount borrowed is based on the school’s cost of attendance (COA). The COA is an estimate that includes both “direct” and “indirect” costs. 

Direct costs

Direct Costs are things like tuition and fees, or what the student sees on the bill from the college or university.

Indirect costs

Indirect costs are things like books, insurance, room and board, travel expenses, etc.  

When it comes to loans, carefully consider what you need and accept only that amount!

Since the direct costs are pretty much what the college or university requires for tuition, it is pretty cut and dry as far as how much loan money is needed. Students should always make sure that all free funding options are exhausted before taking loans to cover tuition and fees expenses. 

Now for the indirect costs, which can differ from student to student spending on where they live, the expense of books required, lab costs, clubs joined, etc. all  Students should consider the loan amount they need to live and be successful students. After careful consideration of what they need, and only what they need, they should request the amount of funds to cover that. 

As a reminder, all students should think about free funding options first!

Student loan refunds

Sometimes, students may end up borrowing more than needed. If this happens, the student will receive a refund. You must cancel all or part of your loan within 120 days of receiving the loan in order to have no interest or fees attached. 

The refund money can come in the form of a check, direct deposit, or credit to your school account. Student loan refunds are disbursed every semester, usually after the school’s add/drop period.

Also see: How do student loans affect my credit score?

What to do with unused student loan money 

Return the money

Student loan refunds don’t have to be used. Federal loans can be returned within 120 days without having to pay interest. However, students will have to pay interest on returned private loans.

When you take out unsubsidized federal or private student loans, the funds will begin accruing interest immediately. Therefore, it is always best to return any excess student loan money in order to avoid interest charges. 

In order to return the money, you’ll have to contact your loan lender directly and ask them how to give back the money. While you may have to be persistent in returning the loan money, it is in your best interest to return any funds that are not needed. 

For some reason you waited too long to return unwanted loans–what now?

As mentioned, students will have to repay any refund money that they use, often with interest. We stress that you should return all funds not needed, and make sure that you do not accept more than you need the next semester 

If for some reason you absolutely cannot return the money, be sure to spend your refund on education-related essentials. 

Pay any existing student debt 

If you have existing student loans and debt, it may be wise to use your unused student loans in order to pay these expenses off. Typically, there are two debt payoff strategies available for students to use in this scenario: 

  • Debt avalanche method
  • Debt snowball method

Debt avalanche method 

  • Pay off debt with the highest interest rate first
  • Move on to the next highest interest rate debt after the first is completely paid off and repeat 

Debt snowball method

  • Pay off smallest debt first
  • Move on to bigger debts after and repeat 

Remember, there are no prepayment penalties for both federal and private student loans, so there is no penalty for paying off student loans early! However, do not put yourself in a position to be unable to pay off loans because you used your unused student loans to pay off other loans. This can end in a tricky financial situation and can be avoided if you return the money instead. 

See also: What to do with a student loan refund check

What not to do with a refund check

A student loan refund may “feel” like a cash refund that you can spend on anything. It can be tempting to use the refund on nonessentials such as a vacation or shopping. However, any money that you spend will end up costing much more when you repay it with interest.

Also see: Paying off student loans early

How to prevent unused student loans next time 

Typically, you will receive a financial aid award letter at the beginning of the semester that reveals how much aid you qualify for. What you qualify for and what you need may be different. However, it is common for students to take out the maximum amount of loans they qualify for in order to afford college. With careful consideration of what you actually need, you can avoid doing so. 

If you mistakenly took out more than you needed, evaluate and then adjust how much you take out for next semester. As stated earlier, students should carefully consider what they need to be a successful student and only take the loans necessary to achieve that. 

Sit down and review your expenses for that semester including transportation, housing, and other miscellaneous bills. Then, consider if your expenses will be the same or different for the upcoming semester. Lastly, take out the amount of loans you calculated for rather than the maximum amount for that semester in order to avoid obtaining unnecessary loans. 

Also see: How to create a budget as a college student

Other student loan resources

If you’re in the process of taking out or repaying student loans, we’ve got a lot of resources to help you make your choices. Our guide to the best student loan repayment plans is a great place to start. We especially recommend checking out income-based repayment plans. We can also guide you through different types of student loans, including federal Stafford and Parent PLUS loans, and help you weigh different private loan opportunities.

If you’ve taken out loans from several sources, you may also want to consider refinancing or consolidating. These options can help make your payments more convenient and reduce interest. Finally, we can guide you through identifying and avoiding student loan scams. Good luck with your college financing!

Frequently asked questions about unused student loans

What happens to student loan money that is not used?

Colleges return unused student loan money to the student.

What causes unused student loans?

Students will end up with unused student loans if they take out more in student loans than they need to cover their educational expenses any given semester. This often happens due to a miscalculation in a student’s financial means or expenses.

Do I have to pay interest on unused student loans?

You can return unused federal student loans within 120 days to avoid paying interest. However, if your unused student loans are private, you will probably have to pay interest. This is why, especially when taking out private loans, it’s a good idea to calculate how much money you will need very carefully. This will avoid spending unnecessary money or interest.

Will unused student loans hurt my credit score?

Unused student loans do not directly hurt your credit score. However, if you choose not to return them, and instead spend them on unnecessary expenses, you might hurt your credit score by running up debts you can’t pay back. Make sure to either return your unused loan or spend it on necessities.

Do student loans expire after 10 years?

Student loans do not, by default, expire after 10 years. You may have heard of this idea because of the fact that many people choose repayment plans that set them up to finish their repayment 10 years after the disbursement date. You could also be thinking of the Public Service Student Loan Forgiveness Program. This program could forgive your federal student loans after a certain length of public service positions.