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Student Loans, Scholarships & Debt Podcast Episodes
The Student Loan Refund Check
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Roy Durnal, Director of Student Services at IU Bloomington, calls in with information on student loan refund checks and how they work.
Read the Show Notes
We wanted to take this opportunity to give you more information on what might be your best friend at the beginning of each semester - the refund check. We get it. It’s a touchy subject, likely because that best friend can be a necessity when money’s tight. With a few more insightful tips into how the refund actually works, though, we hope that you’ll reconsider every time you check “yes” to taking out more in loan money - and that you’ll thank yourself for later when you have to pay it back.
Of course, we understand that in many cases, you really do need that refund money. No argument there. What we advise is that you practice informed borrowing so you have a better handle on your debt when you graduate and start making payments on those so-called “refunds.” What we want you to be most mindful of when it comes to the financial aid “refund” is that those checks are for actual dollars intended only for your educational costs, and you will have to pay them back. Not only that, but they’ve already started to earn interest once you accept them. So, let’s break down the definition of a real refund and what you’re looking at with the financial aid refund check.
Refund: Money you receive back due to having made an excess payment; a reimbursement
Financial Aid Refund Check: Money that you have already borrowed in excess of what was necessary to cover some of the basic costs of your education
The typical definition of the word “refund” implies that you are getting something back because you spent too much somewhere. Whereas the financial aid refund isn’t actually money you’ve spent. It’s money you’ve borrowed from the government that more than covers what financial aid needed to cover parts of your cost of attendance including tuition and fees, and room and board. Your total cost of attendance also includes books and supplies, travel, and miscellaneous expenses, all of which are other eligible educational expenses where you can use your financial aid/loan money. The result is that you receive the overage check in the mail or your bank account for what you’ve already taken out - and in essence, what you’ll have to pay back later...with interest. This is neither money you have yet spent or repaid.
So while it may just look like magical money with your name and instant gratification spending written all over it, available for you to cash in on at your every whim until it’s gone, you will have to pay it back. That $500 you got last month? If you’re a senior, before the end of the year, you’re looking to pay back about $530 just for that one check - and at least that much for every additional $500 you take out, check or no check. This is also why it’s good to know how much you’ve already borrowed, how much you will still need to borrow before graduation, and what the terms and interest rates are on reach of those loans.
As Alex mentions in this podcast this week: don’t go on financial aid auto pilot. Your finances can and will likely change a bit each semester. Allowing a loan lender or the financial aid office to make the decision for you on how much you need without personally monitoring how much you’re taking out makes for a lazy aid recipient - and one who is likely to get more than necessary back in a check each semester. More money back equals a greater temptation to spend on what you don’t really need, because, hey, it’s more money! It’s best to keep tabs on where you are financially so you can be a smarter borrower.
Bottom line: Only borrow what you need for your educational expenses - things like books and school supplies. While it may be the only income you receive for several months, think of it as a lesson in building a spending plan for the next few months until you have another means of income. If you blow it all when you first get the check or use it for things like a new TV or toward paying off your new car, you might find yourself regretting it upon repayment.
And if you over-borrow, it’s never too late to return the money to your lender. Even if you use direct deposit, while it might be a bit more complicated, talk to your bursar’s office and get that rectified if you don’t actually have a use for it. The refund check isn’t often free money. In fact, according to Roy on the podcast, in many cases, it’s raw debt in the form of a check. So, be mindful not to spend it like it’s free money for your personal expenses.
For a list of qualified expenses that are considered educational costs, talk to Financial Aid.Season 4: 02/16/2015