When you apply for student loans, you must estimate how much you’ll need to borrow for the upcoming semester. If you project too high—or were able to lower your college expenses—you may have some excess cash after covering your tuition and other fees. Although using that money for splurges like a trip during spring break may be tempting, there are better (and wiser) ways to utilize unused student loans. Consider these five smart things to do with any excess funds.
1. Return the money
When you take out student loans, the lender typically sends the money straight to your college. The school then deducts the cost of tuition, room and board, and necessary fees from the loan amount. If there’s anything left over, your college credits it to your account or disburses it to you to use as you wish. If you borrowed too much for the semester, one of the best things to do is simply give it back by contacting the financial aid office or your loan servicer. It will cut down on interest, and you’ll have a smaller balance.
Depending on the type of loans you have and when you return the money, you can avoid interest and fees on the excess amount. According to the Master Promissory Note for federal student loans, you have up to 120 days to return excess funds; if you do, all interest charges and fees on the returned amount will be waived. For private student loans, how returned funds are handled varies by lender, but some will also waive fees if you return the money within 120 days.
2. Prepay your loans
If you miss the window to return your student loans without interest or fees, you can still prepay the loans early. Even if payments aren’t due while you’re in school, you can put the excess amount toward your loan balance at any time. It will reduce the amount of interest that accrues and help you get out of debt faster, thus saving money over time.
3. Cover your living expenses
Student loans aren’t just for tuition and dorm costs. You can use your loans to cover some of your other living expenses, even if you decide to live off campus and commute to school. Three qualified examples of other uses for student loans include:
- Transportation: The cost of fuel, car insurance, or bus passes
- Food: A college meal plan or the cost of groceries for meals
- Disability-related expenses: The cost of assistive listening devices, electronic readers, or note-taking services
You can view the full list of allowable educational expenses in the Federal Student Aid Handbook.
4. Get care for dependents
If you have dependents that rely on you for their care—such as children or elderly parents—and you need help so you can attend classes, you can use student loans to pay for dependent care costs. It’s an allowable expense that’s valuable for parents who need more flexibility while working toward a degree or students who care for ill or disabled parents or siblings.
5. Pay for your books and supplies
If you have any leftover student loan money, you can use a portion of it to pay for items you need for college like textbooks, equipment, or software. For example: If you’re taking a course in graphic design, you can use your loans to buy a laptop and sign up for subscriptions to Adobe Illustrator or InDesign. Suppose you find it easier to express your ideas verbally than write your thoughts. In that case, it may be helpful to purchase voice-recognition software like Dragon NaturallySpeaking so you can do your homework or write papers more efficiently. If you’re working on a major paper for a science class, you could use your loans to purchase subscriptions to academic journals to cite in the assignment.
6. Set aside money for emergencies
Unfortunately, emergencies and unexpected expenses are inevitable. Whether you get a flat tire on the way to class or need a prescription that isn’t covered by insurance, you’ll occasionally need sudden excess funds. Setting aside some of your loan money in a savings account ensures you’re ready for those emergencies and prevents them from derailing your education. Federal Student Aid has videos and resources to help you create a budget with your student loan dollars and plan for unexpected expenses.
7. Pay off high-interest debt
If you have multiple forms of debt—such as student loans and credit cards—and you have extra money left over after paying your other bills, you could use your excess student loans to repay the highest-interest debt. Getting and keeping credit card debt under control can be hard, and excess loan money may be just what you need to get back on track.
Make sure you only use your student loans to cover essential expenses rather than unnecessary splurges. When it comes time to pay it back later, allowing your loans to go into default is not something you want to do. Choose the option that will both maximize your payments now and leave you with the least debt in the long run.
Want to arm yourself with more knowledge before taking on more debt? Check out all the advice under our “student loans” tag.