Written By Melanie Lockert
Borrowing student loans to supplement other types of financial aid, like scholarships and grants, is a common way to cover your total cost of attendance. Once your school processes your student loans to pay tuition and fees, you might wind up with extra money.
Although you can use the fund to cover other school-related expenses during school, you can also choose to return unused student loan money. In most cases, you can return all or a portion of unused student loan funds. However, the timeline and process varies depending on the type of student loan debt you have.
Returning unused federal student loans
Federal student loans are what you get when you fill out the FAFSA and come from the U.S. Department of Education. These federal government backed loans are the preferred option over private loans as they have a wide array of benefits for student loan borrowers. One of those benefits is the ability to return unused student loan money within a specific time period.
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Generally, you have up to 120 days to cancel a part of your unused federal student loan money. You won’t be charged any fees or interest on the returned funds as long as it’s done within this timeframe.
Although that gives you about four months to effectively return the money you don’t need and lower your loan balance, it’s wise to take action sooner.
The National Association of Student Financial Aid Administrators (NASFAA) suggests canceling a portion of the federal loan before it’s disbursed. Though every school might have a different student loan disbursement schedule, funds may be disbursed 10 days ahead of the school semester.
If you’ve calculated your budget and reviewed your total student loan amount and realized you’re borrowing more than you need, contact your school’s financial aid office ASAP.
Returning student loans after disbursement
Returning student loan funds after they’ve been disbursed is still possible. You have a 14- to 30-day window to contact the financial aid office and notify them about canceling all or a portion of the disbursement.
I did this when I was in graduate school at New York University. They offered me $89,000 but I canceled everything aside from tuition costs, books, and fees (which was still $58,000) and worked part-time jobs to cover my living expenses. Doing so significantly reduced my already-high debt load.
The financial aid office will do the heavy lifting in this case and return the student loan money on your behalf. How much time you have to return unused student loan money can differ by school and when they provide your loan cancellation rights letter.
If it’s beyond the 30-day timeline, you still technically have up to 120 days to cancel a loan. However, NASFAA states that schools don’t have to work with this timeline, though many do. If your school doesn’t, get in touch with your loan servicer (which we cover in the next section).
Whatever the time frame is, contact your school’s financial aid office ASAP. Ask which forms are required to make adjustments to federal financial aid. Be specific about either canceling a disbursement ahead of time or returning unused student loan money. Keep a paper trail so you have the necessary info for your records.
Returning student loans after 120 days
If you have leftover loan funds several months after first receiving them, and have already covered all of your school-related expenses, you can still return the unused student loan money after 120 days. The process, however, will be different.
Instead of returning unused student loan money to your school’s financial aid office, you’ll have to contact your loan servicer.
If you’re unsure who your student loan servicer is, log into the National Student Loan Data System. If you don’t have one already, create a Federal Student Aid ID (FSA ID). Be sure to put it in writing that you’d like the funds to be applied to your principal balance.
The caveat to returning funds after 120 days is that you’re on the hook for interest accrued, plus any fees. This is particularly relevant for Direct Unsubsidized Loans which accrue interest while you’re in school.
What happens if you drop a class?
Your enrollment status can also affect your student loan financial aid eligibility. For example, if you’re enrolled half-time, but drop a class which puts you at below half-time enrollment, your loan repayment timeline might kick in, depending on your loan.
Additionally, if you drop a class within the eligible period, schools can take up to 30 days to get course funds refunded to students. Keep this timeline in mind and factor in how it might affect the 120-day return window for your unused student loan money.
Returning unused private student loans
Whether you can return unused student loan money from private loans, wholly depends on your lender. Each lender sets its own protocol for returning unused student loan money and can vary.
The same logic as federal loans applies, though — canceling the unused portion of your loan before it’s disbursed is ideal. Typically, once your student loans are certified by your school, there’s a period before disbursement, when you have a right to cancel.
Ask your lender about its process for returning unused student loan funds. If you’ve already passed your lender’s timeline to return loan funds without interest or fees, you can still return the unused private loans to your lender. However, you’ll likely still have to pay interest on the amount that you send back.
Private lenders might have in-school payments of some type, so you can simply send the money back via a large student loan payment. Sending back the money, even via payment and paying some interest, is still beneficial. Repaying the funds earlier can lower the total cost of the loan and the interest that accrues over time.
What to do if you miss the deadline to return student loans
If you miss the deadline to return unused student loan money, you can prepay your student loan debt. Consider it an advanced, big lump sum payment. It’ll feel good to see your balance drop dramatically after taking this step.
There’s one situation that might make you hold off on making a large prepayment.
If you’re planning on pursuing student loan forgiveness, like Public Service Loan Forgiveness Program (PSLF) or income-driven repayment (IDR), prepaying your student loans wouldn’t make sense. When participating in loan forgiveness programs, your goal is to pay the least amount on your student loan debt during repayment so that you have the maximum loan amount forgiven after meeting program eligibility requirements.
If you’re unsure about what to do with your student loans or how to navigate repayment, get in touch with Student Loan Planner for a personalized consultation.
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