Hanging onto unnecessary federal loan funds is a losing proposition — even if your student is “saving” them to use next term. At current interest rates, no savings account will pay more than the interest building up on those loans, and federal loan funds can’t be safely invested to earn as much as they cost in interest.
So as your student gets a feel for his or her fall college expenses, here are some tips for saving money on federal loan funds borrowed to pay those costs:
(A) Return unneeded loan funds within 120 days: If your student figures out he or she won’t need them, he or she may contact the financial aid office and ask about how to best return the loan funds not needed for the term*. When this is done within 120 days of the funds being disbursed — i.e. paid toward tuition and fees or turned over to your student, whichever is earlier — Washington cancels its 1% loan fee, plus any interest that piled up on the returned amount. It’ll be as if those funds were never borrowed!
If your student received funds from multiple federal loans, the returned amount will pay them down in the following order — (1) Federal Direct Unsubsidized Loan, (2) Federal Direct Subsidized Loan (3) Federal Perkins Loan; and (4) Federal Direct Parent PLUS Loan.
(B) Reduce next term’s federal loan(s) if that’s affordable: If your student is scheduled to get federal loan funds for the next term, this is a good time to consider whether or not all those funds will be needed to cover that term’s tuition and other expenses. If not, advise your student to tell the financial aid office to downsize that term’s loan(s).
(C) Amounts returned can usually be re-borrowed if necessary: What if your student’s expenses turn out to be higher than expected? He or she can always go back to financial aid and request more loan funds, generally up to the amount that was returned. And interest won’t begin building until the new disbursement date for the re-borrowed funds. Note: Your student needs to request these funds at least two weeks before they’re needed. It sometimes takes that long for the funds to arrive from Washington.
* Sometimes financial aid offices will return unneeded loan funds for students and sometimes they will give students guidance on how to return such funds themselves.
College Affordability Solutions offers 40 years of experience with federal student loans. Call (512) 366-5354 of email firstname.lastname@example.org if you’re interested in getting its advice on your federal loans.