College Finances: What Happens to the Leftover Financial Aid Money?

Because paying for college can be so expensive, financial aid is usually a necessary part of covering your costs. But what happens to the leftover financial aid money? Can you keep it? Or do you have to send it back?

Let’s take a look at how financial aid works and what you need to know if there’s leftover money.

Getting your financial aid

When you apply for financial aid using the Free Application for Federal Student Aid (FAFSA), the government determines how much you should contribute to your education as well as what types of financial aid you can receive.

After you fill out the FAFSA, you’ll know whether you’re eligible for grants and subsidized student loans. You will also receive information about unsubsidized student loans. Your state and your school might also use the FAFSA to determine whether you qualify for need-based scholarships.

Finally, you can also get scholarships from other organizations.

All of this financial aid is usually sent directly to the school to pay for your tuition and fees and sometimes on-campus housing and meal plans. 

Financial aid refund disbursement

After all the bills at the school are paid, however, there might be money left over. In that case, your school’s financial aid office or bursar’s office will refund the money to you in a separate disbursement. The office may send you a check, or the money might be deposited in your checking account. It’s also possible to leave the money in your school account so it can be used in a future semester.

Once that’s done, you can use the leftover money for purchases that aren’t usually automatically paid for using your financial aid. They can include textbooks, equipment, lab fees, a laptop and other materials. If you live off campus, your financial aid refund disbursement can be used to pay your rent and other costs. Realize, though, that some types of aid, such as scholarships and grants, might have limitations on how they can be used.

What happens to the leftover financial aid money?

When you have an overage from financial aid such as scholarships and grants, you might have to report that information as income on your taxes. Later, that can affect your federal financial aid.

It’s also important to note that any money you earn from a federal work-study program needs to be reported on your taxes.

You can use the leftover aid money to help with various expenses, including traveling to and from campus and purchasing food. Understand, however, that you can be taxed on the extra money that isn’t used for approved purposes.

What happens if I don't use all of my student loan money?

The situation is different if you have leftover financial aid money in the form of loans. Because loans aren’t considered income by the IRS, you won’t have to report the extra on your taxes.

However, depending on your situation, it might make sense to send the extra money back. For example, if your leftover financial aid money is in the form of a federal loan, you can send it back, reducing your overall balance.

If you have a subsidized federal student loan, you don’t have to worry about interest accruing while you’re in school. You could keep that money in your school account and use it later, reducing your need for student aid in a subsequent year. Then, at the end of your schooling, if you still have subsidized money left, you can return it before interest starts accruing.

Unsubsidized federal student loans begin accruing interest immediately, so if you don’t send the money back, you will have to pay interest on it at some point. The same is true if you have private student loans. Any overage you don’t send back will start accruing interest immediately.

You can choose not to send loan money back. You just have to be aware that the money is supposed to be used for education expenses at some point and that it will increase the amount you owe.

Planning ahead to avoid interest on student loans

Even though most schools provide an estimate of how much it costs to attend, you might apply for a lot of financial aid to make sure you’re covered. In order reduce how much you need to borrow — and how much you end up paying in interest — know how to apply your student financial aid more effectively:

• Use free money first: If you have grants and scholarships, use them to cover your costs first. This money doesn’t have to be repaid, so if you have a Pell Grant and need-based or merit-based scholarships on top of it, use that money first.
• Apply subsidized loans next: For those who still owe money on schooling after grants and scholarships have been applied, the next step is to use subsidized federal loan money. While you have to repay the loans, interest won’t accrue while you’re in school.
• Turn to unsubsidized federal loans: Your next step is to use unsubsidized federal student loans to make up the difference. Interest begins accruing immediately, so if there are leftover funds from these loans, it can make sense to send the money back.
• Private student loans: If you still have a funding gap, you can turn to private student loans. You might be approved for a larger amount than you need, so you can return the money if there’s extra. However, if you get a low interest rate and a good deal on a private student loan through an organization such as Juno, you might save the money for another semester.

There are other ways to make money and reduce what you pay in interest. You can save money ahead of time or work while attending school. 

Bottom line

What happens to the leftover financial aid money? Well, that depends on you and how you want to handle it. In general, you’ll receive a refund. You can then decide whether to send the money back or keep it and use it for future educational expenses.