What to Do With a Financial Aid Refund

It’s Not Free Money - Use Your Refund Wisely

fin-aid-refund

College students may receive some money every semester in the form of a financial aid refund, or a credit balance. If your first thought on receiving this money is, “It’s party time!” you better think about that decision much longer. This is not free money. Most likely it is coming from borrowing too much on student loans, and you will have to repay this amount once you graduate. The best choice is to spend it on books and college-related expenses, not on day-to-day living costs or frivolous expenditures.

It might seem like you have found the perfect source of money for that ski trip, but that jaunt could cost you a lot more down the road when you start making payments on your student loans.

When a high school student receives a financial aid award letter, the document lists the anticipated Cost of Attendance and subtracts the Expected Family Contribution to determine financial need. Typically, financial aid consists of grants, scholarships, work-study programs and federal student loans. Once the aid package is accepted, the loans are disbursed to the school. Quite frequently, though, circumstances change between the acceptance of financial aid and the beginning of the semester. The student may decide to live off-campus or might win outside scholarships, or the school might have included indirect expenses in its cost of attendance estimate but it requires students to pay for those amounts themselves.

Any funds that remain must be returned to the student every semester. This amount may be deposited directly into a bank account, credited to the student’s account, or paid out as a check. The student does not have to accept this money and can request that it be returned to the loan originator.

Although the theoretical purpose of this refund is to use it for college-related expenses, many students are thrilled with this sudden windfall and spend it foolishly.

Instead of viewing it as a loan and setting up a budget that will help cover some of their out-of-pocket costs throughout the semester, they go on a weekend trip or throw a great party. Others simply fritter it away on coffee, snacks, pizza and entertainment that will eventually prove to be very costly. Then, they watch in horror as their funds are quickly depleted and they find they don’t have enough money to live on. Mom and dad may not be happy to help if they have just paid out a large sum for tuition.

Typically, the next refund won’t be available for six months. If you don’t think you can handle having all this money at once, you can ask if your school has any disbursement options that might spread out the amount over several months. You do not have to accept the entire amount of student loans that are offered to you, and can talk to the financial aid office about reducing this amount for the next semester.

Another possible surprise is in store for students who withdraw from classes or from college altogether. They might actually owe financial aid back to the college, including the amount of the refund. If it has already been spent, it adds tremendously to the student’s debt problems.

Forbes focused on three common mistakes with these student loan refund checks: thinking of the refund as “free” money, failure to budget properly, and skipping part-time employment while using the funds to cover living expenses. Think carefully about what to do if you receive one of these student loan refund checks.