Insider Tips on Financial Aid Refunds

If you are one of the millions of college students who receive a financial aid refund from your college or university each semester, you may be wondering what these funds are for. Simply put, a financial aid refund (sometimes referred to as a "credit balance") is money that is left over from your financial aid award after tuition and fee charges have been paid. Under U.S. Department of Education rules, these credit balances must be paid to students in a timely fashion each semester.

How Your Refund is Determined

Colleges and universities determine financial aid awards by using what is referred to as the Cost of Attendance, which includes not only tuition and required fees, but also other education-related expenses such as room and board or living expenses, books, personal expenses, and transportation. Schools then subtract the student's and family's expected contribution to determine "financial need." Typical financial aid packages contain a combination of grants, loans and work-study to try to meet that need. Once the package is accepted by the student, the school will apply that aid (beginning with grants first) to the student's bill and any money left over is disbursed back to the student as a refund. The size of the refund may vary considerably depending upon whether the student lives on campus or not, and if he or she accepted all the student loan money that was offered.

What Your Refund is For

Financial aid refunds are intended to be used for out-of-pocket school expenses such as books, gas to get back and forth to class, and rent. The funds also have to last the whole semester, so it is really important to set up a budget of how much you can reasonably spend each week.

For many students, receiving a large check or deposit from their school may be the most money they have ever had access to, particularly all at one time. Without experience with managing a monthly budget or planning for expenses later in the semester, many students are caught unprepared and may think of these funds as "free money" to spend frivolously. They're too focused on the here and now, and they may not really think about the fact that most, if not all, of these refunded dollars are from student loans that will have to be paid back whether they complete their degree or not.

Five Foolish Things Students Did with their Refund

Bryan Ashton, Assistant Director of the Student Wellness Center at The Ohio State University, reports that students struggle with making their refunds last until their next refund arrives, which can be as long as six months. "We try to work with students on reserving a small portion of their refund for emergency expenses. We find that a large source of financial stress comes from emergencies that pop up, particularly later in the semester," he said. In addition, he noted that "some students do not see these funds as loan money, and consequently do not use them strictly for education-related expenses."

Some students choose to spend their refund money unwisely, leaving them with little or no cash left. Here are just few examples:

• Threw a big party
• Paid for a spring break trip
• Made a down payment on an engagement ring
• Purchased a new car
• Spent $300 on premium headphones

What Some Schools are Doing to Help

Some schools are trying to help students resist the temptation to spend these funds all at once by providing bookstore vouchers for the first couple of weeks of the semester before disbursing the rest of the credit balance. Other schools are using multiple disbursements as a means to spread payments out over the course of the semester. One notable example is a research project called "Aid Like a Paycheck" which disburses refunds every two weeks, like a paycheck, to help students achieve a good balance between time spent on school and work, and better manage their limited aid throughout the semester. The study is trying to determine if dispensing aid in this manner will help students stay in school and complete their degree programs.

If you are getting a large refund, it may be a signal that you are borrowing way more than you really need to meet your college expenses. Take a good, hard look at your expenses and determine whether or not you really need to be spending borrowed money on coffee and new clothes when you could be reducing the amount of student loans you'll have to pay back. Start by looking at how much you spend dining out instead of cooking at home. Spending $7 on lunch out four times per week, for example, adds up to more than $1,450 per year. Cutting back to just two days per week will save you over $725!

Also, talk with your Financial Aid counselor about how to accept less student loan money the next time around--you'll thank yourself down the road.