Redefine Your Refund


February 3, 2017

We know it’s tempting – it’s the beginning of a new semester and your student aid “refund” has just been deposited into your checking account. You think of how easy it could be to use that money to splurge on all of the things you’ve been wanting – a nicer cell phone, new clothes, or the spring break trip you’ve been daydreaming about… but, before you make these dreams a reality, stop and reconsider what you’re about to do. The “refund” is NOT FREE MONEY!

Oftentimes, student aid “refunds” are only disbursed to students because they’ve received more in student loan money than they need to pay directly to their college or university for that semester.

What does this actually mean? The money that you’re receiving is most likely money that you’ll have to pay back after graduation… with interest. That said, accepting only the loan money that you need to pay for your educational expenses can greatly reduce the debt you’ll have to pay back. Using the calculator provided by studentloans.gov, we looked to see the impact of reducing your loans by $1,000 at the current interest rate for subsidized federal student loans (it’s currently 3.76%, but the calculator automatically rounds it up to 3.8%). By accepting just $2,500 instead of $3,500, our estimated repayment time on the Standard Plan was reduced by 25 months – more than two years – and the amount of interest paid was cut by more than half. If reducing loans by just $1,000 for one year can make this big of a difference, imagine the effect of reducing your loans by that much (or more) for all four years of college.

Subsidized Loans Borrowed at 3.8% fixed Interest Rate Time it Will Take to Repay Using Standard Plan Minimum Monthly Payment Total to be Paid Back (Including Interest) Amount of Interest Paid
$3,500 80 months
(~6.7 years)
$50/month $3,968 $468
$2,500 55 months
(~4.6 years)
$50/month $2,728 $228

Outside of any financial consequences of spending money on things you don’t truly need, there are also regulations that govern how you’re allowed to spend your student loan money. Federal student loan money can only be used for educational expenses at the school that awarded your loan – this includes tuition, room and board, fees, books, supplies, equipment, dependent child care, transportation and rental/purchase of a personal computer. Notice that new flat screen TVs or trips aren’t mentioned?

In the end, responsibly managing your financial aid refund gives you control over your debt and pays off in the long run. Come up with a realistic budget to see what allowable costs you’ll have during a semester. Then, talk to the financial aid office at your school for information on how to return any extra money and reduce the amount of your loans (trust us – your wallet will thank you in the long run).

Find more money management tips and resources on our WalletWorks page.

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. PSECU does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs or websites. PSECU does not warrant any advice provided by third parties. PSECU does not guarantee the accuracy or completeness of the information provided by third parties. PSECU recommends that you seek the advice of a qualified financial, tax, legal or other professional if you have questions.