Many students (and sometimes their parents) borrow student loans to cover costs associated with college including tuition, housing, and living expenses. But what happens if they borrow too much? 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. This money may be refunded in the form of direct deposit or a check. Read on for more information on for more details on what a student loan refund is, how to get one, and what to do with 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 in a mailed check.
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.
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.
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.
In that case, 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, 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.
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Common Student Loan Refund Mistakes
When it comes to 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 post-disbursement 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 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.
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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 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 miss 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.
Refinancing Student Loans
All that 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 and in some cases can lead to a lower interest rate.
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 with SoFi can help qualifying borrowers secure a competitive interest rate, and potentially save money in interest over the life of the loan. There are also no hidden fees. It’s time to send origination fees and prepayment penalties packing.
Refinancing can be a solid solution for graduates who are working and have high interest, Direct Unsubsidized Loans, Graduate PLUS loans, and/or private loans.
It’s worth noting that when someone refinances their federal student loans, they will lose federal benefits such as Public Service Loan Forgiveness and economic hardship protections, like deferment or forbearance.
When someone refinances their student loans with SoFi, they also gain access to unique perks like career coaching and financial advice, at no cost to them.
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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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