So, your tuition and study materials are covered, and (thankfully) you still have money left over from your financial aid package. All of you…
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But now the question arises: what to do with the remaining financial assistance? Spend? Save it? Let’s run through your options now.
What to do with excess financial assistance
There are three smart steps you can take with excess financial aid: return it; use it to cover living expenses; or save it for a rainy day. Let’s look at scenarios where each of them could make financial sense.
Give it back
While it may be tempting to keep extra financial aid for yourself, there are also good reasons to consider returning it.
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First, excess financial aid is not free money (unless you received some kind of grant or scholarship). You will pay back the money you borrowed, and on top of that, a lot of interest will be added.
So why not return what you don’t need? Not only will this help you finish your studies with less debt, but it will also help lower the monthly payments you will be responsible for after you graduate.
It may seem strange to refuse what seems to be an additional financial cushion. But given that it takes the average person 20 years to pay off student loan debt — for an average monthly payment of $460 — your future is sure to thank you.
Read more: How student loans work
Use this to cover your living expenses
In addition to tuition fees, fees, and books, there are many expenses you will need to cover, especially if you live off campus. You might have rent, utilities, groceries, a phone bill, car insurance, and more.
Using your excess financial aid, scholarships, and grants to cover some of these expenses can give you some breathing room if times get tough.
Tip MU30: You may have to pay taxes on any excess aid you do not use for school-related expenses. Details can be found on the IRS website.
Save it for a rainy day
We understand you want to enjoy your student years and not worry about money. But remember, anything can happen. You could lose your part-time job, face unexpected medical expenses, or need to replace your broken laptop.
Having an emergency fund to cover these types of crises can give you peace of mind and help you stay on track to earn your degree.
So, if you have excess financial help, consider hiding it in a high-yielding savings account like Discover Online Savings or CIT Savings Builder. Both have no monthly fees and receive an average interest rate that is at least five times higher than a traditional bank.
Read more: Comparison of the best high yield savings accounts
What NOT to do with excess financial aid
While there are many good things you can do with excess financial help, there are also a few things you absolutely should not do. Here are three giants.
Invest it
At first glance, investing in excess financial aid sounds like a BIG idea. If the average stock market returns are 10%, why not invest the money and pocket the difference?
But it’s actually very risky. Let’s look at a few reasons why.
First, getting into debt to invest is never a good idea. The stock market is already a risky business. And when you take on those risks with borrowed money, the consequences can be multiplied if it doesn’t work.
Second, no one can predict how the stock market will move. On average, this can give a 10% profit, but this is just an average. In fact, the stock market fluctuates a lot from year to year. It could be 15% one year, -10% the next, and 5% the next.
The last thing you want to do is invest your excess bailout and then start paying it back when the market drops 10%.
And finally, investing your student loans isn’t technically illegal, but you can still get in trouble if you get caught. For example, students investing in subsidized federal loans may be forced to repay all of the interest the government paid while you were in school.
Similarly, some private lenders may have stricter rules about what you can and cannot do with excess assistance. So it’s always better to play it safe.
Read more: Is using a personal loan to invest in the stock market a good idea?
Blow on funny things
Using your excess financial aid to fund a luxurious lifestyle—like spring break trips, cute clothes, and trendy apartments—is another thing you don’t want to do. Not only does this reinforce bad financial habits, but it can end up ruining your finances for decades to come.
There are a lot of stories on the Internet about students who took out the maximum amount of loans each semester, only to not pay back these loans after graduation because the payments were too high. As a result, it is almost impossible for them to buy a house, a car, or even take out a credit card.
Of course, defaulting on a loan is the worst-case scenario. But still, saving money for college entertainment (rather than using excess aid to cover it) will help you build a strong financial foundation that will benefit you for the rest of your life.
Read more: Here’s What Happens If You Don’t Pay Your Student Loans
Pay off high interest debt
The average student loan has an interest rate of 5.8%. In contrast, the average credit card can carry an interest rate of around 18%—nearly three times higher. Looking at these numbers, you might think it’s a smart move to use low-interest student loans to pay off higher-interest debt.
But using student loans to pay off high-interest debt is only a temporary solution to your debt problems. Budgeting, living within your means, and maximizing income opportunities are long-term solutions that must be fully exhausted before you pay off your debt with more debt.
What’s more, in case your finances go awry, be aware that declaring bankruptcy can relieve you of the liability to pay off most forms of high-interest debt (such as credit card debt). But federal student loans are generally only exempt if you file a separate lawsuit called an adversarial process, which is notoriously hard to get.
Read more: How to get out of debt with low income
Summary
There are many things you could (and shouldn’t) do with excess financial assistance. But the smartest move is usually to send it back to the school/lender.
However, if you have any questions about what to do with your excess financial aid, be sure to contact your financial aid office. They can provide you with additional information and help you make the best decision for your situation.