Can You Return Unused Student Loan Money? Understand Your Options

When you take out student loans to pay for your education, you might find yourself with unused funds in a given semester. For example, you might land a scholarship or change your housing situation, lowering your overall costs and leaving you with money you don't need. In many cases, it's possible to return unused student loan funds.

For many students, returning these funds represents a good opportunity. Half of undergraduates leave school with an average debt of $29,300, according to the College Board. The ability to cut down on your total student loan burden can set you up for less financial stress after graduation.

Current private student loan rates

The guide explores how to return unused student loans and the differences between returning federal vs. private student loans.

Can you return unused student loan money?

Yes, it's often possible to return student loans.

Typically, you must return unused federal student loan funds within 120 days of the loan disbursement to avoid being charged interest or fees. You're allowed to return federal loans after that point, but you'll be subject to an interest charge and a loan fee on the amount you return.

The policies surrounding unused private student loan funds vary from lender to lender. If you have unused student loan funds, reach out to your loan servicer to find out if returning them is possible.

How to return unused federal student loans

While you can technically return unused federal student loan funds at any time, it's best to return the money sooner rather than later.

If you discover that you don't need your entire student loan before the funds are disbursed, reach out to your school's financial aid office. You can tell them to cancel all or part of your loan before the funds reach your bank account.

If the funds have already been disbursed, you can return the funds by notifying your school. Some schools impose a specific cancellation time frame — for example, you might have 30 days from disbursement to let them know you'd like to return the funds. But even if you miss your school's deadline, you can reach out to your loan servicer directly to facilitate returning the funds.

When returning your funds directly to the loan servicer, use the following steps as a guide:

• Find your loan servicer: You can determine who your loan servicer is by logging in to your StudentAid.gov dashboard. Look at the details of your loan to find your servicer.
• Get in touch: Reach out to your loan servicer to let them know you want to return all or some of your loan funds.
• Be clear on the return: Make it clear that you're returning your funds, not making an early payment. If you return the funds within 120 days, you won't have to pay any interest or fees.

Returning unused private student loan funds

The rules for returning unused private student loan funds vary from lender to lender. Some lenders allow you to return the funds within a specific time frame. Others may charge you interest and fees regardless of when you return the loan funds.

If you want to return funds to a private lender, reach out directly to determine your options. In some cases, it's as simple as returning the funds within a specific timeline. For example, SoFi can submit a request to cancel a loan disbursement if you contact the lender before the funds have been sent to the school.

With other lenders, you might be on the hook for fees and interest that accrued while you had the funds. Even if you can't return the funds, you can always choose to repay the loan ahead of schedule, which ultimately lowers how much you'll pay in interest over the life of your loan.

What happens if you don't return unused student loan money?

The immediate impact of hanging onto unused student loan money is an unnecessarily large loan balance. For example, if you keep $1,000 in unused student loan funds, that bumps up your principal balance by $1,000.

When your loan repayment starts, this higher loan balance will likely lead to a higher monthly payment. Additionally, a higher loan balance often means paying more in interest charges over the course of the repayment term.

Read More: 8 Ways To Lower Your Student Loan Payments

For example, let's say you chose to keep $2,000 in unused student loan funds, bumping your total balance from $8,000 to $10,000. With a 6.53% interest rate on the 10-year Standard Repayment Plan, your monthly payment would amount to $114 and you'd pay $3,644 in interest over the loan term.

If you had returned the $2,000 and all else remained the same, your monthly payment would be $91, and you'd pay $2,915 in interest over the loan term.

“Every dollar that is prepaid is one that will not have to be paid in the future with interest,” says John Hupalo, founder of My College Corner.

“Reducing the principal outstanding as soon as possible can substantially reduce the total cost of the loan,” Hupalo adds.

Ultimately, returning unused funds means a lower repayment burden. If you keep unused funds, you'll inflate your student loan balance and make repayment more of a challenge.

What can I spend leftover student loan money on?

Beyond the financial impacts of keeping unused student loan funds, spending the funds on a non-education expense is typically not allowed.

“Your loan agreement should tell you how you can (and can't) spend your loan money, even if you took on too much student debt,” says Ken Ruggiero, CEO and co-founder of Ascent Funding.

Ruggiero continues, “Some lenders allow you to spend it however you want, while others send the money directly to your school and only allow you to apply it toward school-related costs.”

For example, leaning on the leftover funds to cover nights out or a vacation might be in violation of your loan agreement. But you'll need to read the fine print to determine what is and isn't acceptable.

Benefits of returning extra student loan money

“Returning unused loan funds lowers overall debt, reduces interest accrual, and can make repayment more manageable after graduation,” says Ruggiero.

“It also helps students develop responsible borrowing habits, minimizing unnecessary financial burdens in the long run,” he adds.

Here's an overview of these key benefits:

• Lower your debt burden: Returning unused student loan money means you'll reduce your total debt before repayment even starts. This can make paying back your loans much simpler.
• Reduce your interest charges: A lower loan balance means you'll pay less in interest charges over the course of the loan, potentially saving you hundreds or thousands of dollars.
• Build good financial habits: Taking your financial situation seriously during school can set you up for a brighter future with solid money habits under your belt.