It’s a common scenario for students (and sometimes their parents) to borrow student loans as a way of covering costs associated with college. Tuition, housing, textbooks, and incidentals can really add up. But what happens if their loan amounts to more than what the bursar’s office has listed as the balance? In that case, they may receive a student loan refund.
A student loan refund is money that the borrower receives when the loan amount exceeds the amount of money required to pay for qualifying education expenses. Say, perhaps you borrowed enough for some living expenses that are not billed via your school. That overage would come to you as what’s called a student loan refund in the form of direct deposit or a check.
So what happens next when you get a student loan refund? Read on for more information on what a student loan refund is and what to do if you receive one.
What Is a Student Loan Refund?
To understand what a student loan refund is, it can be helpful to first look at what college financial aid is and how it is distributed to students. When a student or their parent pursues federal financial aid, such as a student loan, that aid is distributed via a credit to the student’s account at their college.
Private student loans are distributed differently depending on the lender’s preferences. Some private lenders may deliver the funds directly to the student.
Others may choose to credit the student’s college account similar to how federal aid is distributed.
Private or federal, this is where student loan refunds may come into play. Student financial aid can cover costs such as tuition, room, and board, and fees. Here’s more detail:
• On occasion, an aid distribution can lead to there being an additional credit in the student’s college account.
• This happens if there is any excess money after paying for the necessary expenses. In that case, the student or parent will receive a student loan refund via a check or in the form of a direct deposit to their bank account.
• An example of how this might happen is that funds are sent to the student’s school, where the student’s account only reflects tuition. But the amount was also intended to cover textbooks, which the student will buy separately. The overage in the student loan (the part meant to pay for the books) could then be sent to the student.
Or it might be a case of the student having borrowed more than they actually needed to afford their school costs for a particular time period. Perhaps they signed up for a class that wound up being canceled and are now taking a different class that carries fewer credits and less expense.
💡 Quick Tip: Some student loan refinance lenders offer no fees, saving borrowers money.
How to Get a Student Loan Refund
Whether a student or a parent takes out a federal student loan, the process of getting a student loan refund will generally look similar. Each semester, the school will generally review student accounts to determine if there are any eligible credit balances that can be refunded to the student.
If that is the case, here are some details to know:
• The school has 14 days to issue a payment to the student if there is credit on their account. In some cases, schools may determine that credit balances should be applied to students’ future costs at the university.
• In some cases, if the credit is not a result of the student receiving financial aid, the school may require that students request a refund. Follow the refund request process as determined by the school you attend.
• In general, the school in question will contact the student or their parents in writing any time they distribute any loan money. The loan servicer will also provide confirmation that the loan money was delivered.
• Alongside this notice, borrowers will generally also receive information on how to cancel part or all of the student loans. If the borrower realizes they don’t need the full loan amount, this may be an option they want to pursue.
• Know that any amount refunded is still considered part of the total amount borrowed. So, borrowers who receive a portion of their student loans refunded would still be responsible for repaying that amount, with interest, if the refund is not canceled.
• If this is the case, when it comes to federal student loans vs. private loans, the borrower can cancel all or part of their loan within 120 days of receiving it. They will incur no interest during this time and no fees will be charged.
The process of getting student loan refunds may vary when dealing with private lenders.
• If the funds were received by the student to pay for qualified expenses, such as textbooks, the student can go ahead and use it for such purchases (more on this below).
Recommended: How and When to Combine Federal and Private Student Loans
Common Student Loan Refund Mistakes
When it comes to private and federal student loan refunds, there are a few common pitfalls that students and their parents should avoid. Especially if they want to get their hands on a student loan refund check sooner rather than later.
Moving Too Slow
Requesting a student loan refund is a bit of a time-sensitive process.
• If someone realizes they won’t need the full amount of a federal student loan awarded before the funds are disbursed, they can actually request the school cancel the check or deposit before the need to process a refund even arises.
• If the borrower realizes after distribution of a federal student loan that they don’t need all or any of the funds, they have 120 days after the disbursement date to return the funds without incurring interest or fees.
• If a borrower misses both of these opportunities, the process of working with their school’s financial aid office to return the funds can become more complicated and time-consuming.
Not Establishing a Paper Trail
When making a student loan refund request, it may be a good idea to keep a paper trail of all requests and communication in order to establish a clear history of a desire to return the unused funds, if that is your situation. If things get lost in translation (which could happen), having a paper trail can be extremely helpful.
Over Relying on Student Loans
Some students and their parents lean too heavily on student loans and may be able to get a bigger refund if they can find another way to finance any qualified education expenses. Student loans can be used to pay for academic and living expenses for the student while they’re in school.
However, pursuing other forms of financial support, such as a work-study program can allow students to send more of their aid funds back, which will leave them with fewer loans when they graduate.
While it can be tempting to use a student loan refund to cover extra expenses like clothing and transportation — the less that is borrowed, the less that will be owed at graduation.
Just be sure that, if you receive a larger loan disbursement than what you actually need, you don’t wind up spending it on, say, dining out or clothes while in school. While those are part of college life, that could be a misuse of your financial aid.
Recommended: What Happens If You Just Stop Paying Your Student Loans
What to Do With a Student Loan Refund
When a student or their parent gets a student loan refund, they have two main options. They can keep it or return it.
Keep the Student Loan Refund Check
The first option is to keep the refund. This money can be used as the borrower sees fit. Borrowers aren’t required to submit proof of what they spent the funds on which can make it tempting to spend the refund on expenses that aren’t necessarily required for education purposes.
Keep in mind, as noted above, that spending the funds on nonqualified expenses could be considered fraud and is not recommended. It may feel appealing in the moment to use the funds, it may not be the wisest decision. Additionally, a student loan refund is still money that needs to be repaid with interest, so keeping that money may also not be in your best interest from a financial perspective either.
Return the Student Loan Refund Check
If the funds aren’t needed to pay for school, returning the refund check may be the most beneficial choice in the long run. Because, as mentioned, the money will have to be paid back (with interest) and spending it on unnecessary expenses can be quite a disservice to the borrower.
For details on returning your student loan refund check, contact the school’s financial aid office. If the borrower chooses to keep the student loan refund check or misses the deadline to return it, there are still some next steps available to them. One such option is to make a payment on their student loan balance.
Even though federal student loans don’t require payment until the student graduates, this can be one way to cut down student loan debt. The borrower can also use those funds for expenses in the next term and as a result, can choose to borrow less money for that term.
💡 Quick Tip: If you have student loans with variable rates, you may want to consider refinancing to secure a fixed rate in case rates rise. But if you’re willing to take a risk to potentially save on interest — and will be able to pay off your student loans quickly — you might consider a variable rate.
Refinancing Student Loans
Now, imagine that all your hard work has finally paid off. It’s time to cross that graduation stage. Once graduation day rolls around, students and their parents will begin to think about how they want to manage and pay off their student loan debt.
One option that can lead to saving money on interest and potentially expedite the repayment process is to refinance student loans.
When someone refinances a student loan, they get a new loan at a new interest rate and/or a new term. If a borrower initially had more than one student loan, this leaves the borrower with only one monthly payment to make instead of multiple ones. In some cases, this can lead to a lower interest rate or it might mean a lower payment for a longer term. Keep in mind that if you refinance with an extended term, you may pay more interest over the life of the loan. Also know that if you refinance federal loans, your new private loan means that you have forfeited the benefits and protections of your federal loan. For these reasons, refinancing may not be the right choice for all borrowers.
The Takeaway
If there are funds from student loans left over after all tuition and fees are paid, students may receive a student loan refund check. This check can be used to pay for other educational expenses or can be returned.
Keep in mind that this money will need to be repaid with interest. Refinancing student loans can be an option when it’s time to start paying back what you have borrowed.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
SoFi Student Loan Refinance SoFi Loan Products
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
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