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When you take out a student loan, you should be able to estimate roughly how much you’ll need for tuition and other related expenses. Still, it’s not uncommon for some money to be left over.
Why You May Have Leftover Student Loan Money
If you are taking out federal student loans, you can ask about the maximum amount you are entitled to. This amount depends on your school year and whether you are an independent or dependent student. Generally, the annual amount is between $5,500 and $12,500.
Your school will first use these funds for tuition and fees. If money is left over, you’ll receive a check to use for qualifying educational expenses like housing, groceries, bills, and more.
In some cases, students end up with more money than they need. For example, if you received a large scholarship that covers most of your tuition, you may not need as much funding.
What to do with leftover student loan money?
If you have remaining student loan funds, you have several options to choose from. Here’s what you can do with the leftover Financial Aid money—and how to decide which option is best for you.
1. Return the money
One of the best things you can do is return the excess money. When you take out federal student loans, the money immediately earns interest (unless you have subsidized federal loans). But for those with unsubsidized federal loans or private student loans, you’ll be charged interest once the funds are disbursed.
Once the student loans are distributed, you can return the funds or a portion of the funds within 120 days. If you return the money, you will not have to pay any interest or setup fees already accrued or that amount. Contact your financial aid department or servicer and ask how you can return the balance.
If you have private student loans, you need to contact the lender directly and ask how you can return the money. Personal loans can have shorter return times, so try to call them as soon as possible.
Holding excess funds could cost you thousands in additional interest. For example, let’s say you have an extra $5,000 and you decide to keep it. With an interest rate of 7% and a term of 10 years, that extra $5,000 costs an additional $1,966.51 in interest.
2. Use it for other educational expenses
You can spend leftover student loans on other necessities, but you can only use them on qualifying educational expenses, including:
- tuition and fees
- Accommodation and catering
- Technology required for school
- childcare costs
- Transportation to and from school
Only courses that count toward your degree are eligible for student loans. When you study abroad, you can use your student loan money to pay for tuition, fees, and room and board.
Although you might consider using your extra student loan funds for personal expenses — drinks with friends, clothing, entertainment, investments — remember that these expenses are prohibited.
3. Pay off your existing student debt in advance
If you missed the student loan return window and have already made qualifying education purchases, another option is to pay off some of your existing student loan debt.
There are two debt settlement strategies you can use to determine which loan to use your money on:
- Debt avalanche method: Choose the loan with the highest interest rate so you save the most on overall interest.
- Debt Snowball Method: Choose the loan with the smallest balance and pay it off first to motivate yourself.
There are no prepayment penalties for both government and private student loans, so there are no fees if the student loan is repaid early.
This is how you prevent leftover money in the next semester
Every semester you will receive a scholarship notice that shows how much scholarship you are entitled to. You will break it down into grants, grants, and loans. Many students end up borrowing the maximum amount they can because they don’t know how much they need for the semester.
Go through your expenses and break everything down by category, including accommodation, transportation, groceries, utilities, bills, and other. Don’t forget to factor in incidental expenses like ridesharing, food, and more.
Also consider whether or not your expenses will be different for the coming school year. For example, if you’re moving into a new apartment, calculate your rent, utilities, or groceries so you know if those costs will be higher or lower. If you move closer to campus, you may be able to spend less on gas and parking permits. If you move in with several people, you can pay less rent.
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