What Happens to the Money Left From a Student Loan?
Students receiving financial aid from the government or from private lenders may receive refund checks from their schools' financial aid offices if they take fewer credits than anticipated or spend less on school supplies. In most cases, private lenders, banks and the Department of Education will send their awards directly to schools for a financial aid recipient's tuition.
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Overview
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To pay for post-secondary education costs, many students and their parents apply for financial aid. Typically, federal students loans do not require that borrowers begin repaying their loans until they are no longer in school full-time or at least part-time. Although federal student loans allow borrowers to obtain interest-free payments until they begin repaying their loans, the Department of Education establishes annual maximum borrowing amounts, and students can borrow up to the federal limit. Generally, if a student borrows more than she owes for tuition, room and board, books and supplies, the government issues a refund.
Department of Education
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The Department of Education administers the federal student aid loan programs. College students can apply for several different types of federal financial aid loans, including Perkins loans, Stafford loan, Plus loans, federal work-study loans and consolidation loans. The department also administers the federal financial aid grant programs, such as, the Pell grant. In addition to obtaining a federal loan, students can apply for private financial aid through private lenders and financial institutions. Under the federal student loan program, students sign promissory notes guaranteeing repayment. They may use their refund checks to pay for any other educational expenses. Alternatively, they can return their refund checks and receive a reduction in their principal loan indebtedness.
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Refund Checks
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Students borrowing from private lenders must comply with the terms of their loan agreements. Private lenders may implement policies withholding refund checks to reduce a student's principal loan balance. However, most private lenders also refund excess loan amounts. Borrowers can use their loan checks for educational purposes or voluntarily return their refund checks to reduce their principal balances. Since financial aid programs require borrowers to sign promissory notes, the standard practice for the Department of Education and private lenders is to issue refund checks. Schools can issue paper checks and require students to pick them up from their financial aid offices or can mail those checks.
PLUS Loans
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The Department of Education also gives loans to parents who apply for the Direct PLUS Loan program. Students receive Direct PLUS loans based on their parents' financial history, not on the student's financial history, and as such, parents receive overpaid financial aid awards directly. However, parents can authorize a release of funds, so that their student children receive overpayments. Their children must use their overpayment checks for tuition or school supplies.
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