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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!
Also see: How to apply for student loans: federal and private
Student loan refunds
When students borrow loans, the amount borrowed is based on the school’s cost of attendance (COA). The cost of attendance is an estimate, so students may end up borrowing more than needed. If this happens, the student will receive a refund.
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.
Students don’t need to accept or use the refund. If you’re not in need of the extra funds, returning the refund can help pay off your student loans. Any amount of the refund spent will need to be repaid.
What to do with a refund check
As mentioned, students will have to repay any refund money that they use, often with interest. For that reason, be sure to spend your refund on education-related essentials. Some suggestions include:
- Textbooks, notebooks, and other supplies
- Transportation or a parking pass
- Living expenses like rent or groceries
- A new laptop
Students can also save student loan refunds for the future or use them to pay off other debts. It can be worthwhile to put some of the refund aside for emergencies. College life can be unpredictable. According to Sallie Mae, only one in two college students have an emergency fund. You can accept your refund and leave it in your bank account just in case. In turn, you can leave it in your school account in case any other fees arise.
Student loan refunds don’t have to be used. A student can return their refund to the lender. Federal loans can be returned within 120 days without having to pay interest. However, students will have to pay interest on returned private loans.
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.
Unused student loans are returned
Colleges return unused student loan money to the student. Overall, it is up to you what you do with your refund. Be sure to spend it wisely, as any refund money spent will have to be repaid!
Also see: Paying off student loans early
Frequently asked questions about unused student loans
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 need very carefully. This will avoid spending unnecessary money on 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.
Also see: How do student loans affect my credit score?
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.
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!