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When you’re a college student, extra cash is hard to come by. But when an influx of cash is the result of unused student loan money, you’ve got to make an informed decision on how to spend it — especially since you’ll eventually have to pay it back with interest. Do right by yourself and your wallet with these tips on how create the least amount of financial liability if this windfall comes your way.
1. Set it aside for pop-up expenses
You shouldn’t have many expenses as a college student, but occasionally you may have to foot the bill for something unexpected, like a car repair or co-pay for a medical appointment. Use your extra student loan money to cover these costs.
“If anything comes up during the semester, you’ll have the funds to cover it,” says personal finance expert Jeff Proctor, founder of money-saving resource DollarSprout. “If you’re able to hang on to this money year after year, you could graduate with a nice emergency fund set up before heading into the workforce. This will come in handy with moving expenses after college, and it will also free up your income for other things, like paying off debt or building your professional wardrobe.”
If you choose to stash the money away for emergencies, allocate it for that and nothing else. This isn’t free money that you should be spending at the bar or on dinners with friends. As tempting as that may be, you will pay for that frivolousness many times over since interest will continue to accrue on the borrowed funds until you pay them back.
2. Pay down your credit card debt
I wish I told the credit card vultures to keep their plastic when they came calling as soon as I turned 18 so I didn’t max them out within months. And without the money to pay the bills until about five years later, this was a mistake that damaged my credit well into my late 20s.
If you have extra student loan money and credit card debt, choose the highest interest card and pay that bill down (this strategy is known as the Debt Avalanche method). You’ll save yourself a lot of stress, nonstop phone calls from collection agencies, and rejections from financial institutions. It is not worth it, no matter how much you want those new shoes or a quick getaway. Take my word for it. (See also: Are You Paying Off Credit Card Debt the Wrong Way?)
3. Earn alternative college credit
“About 60 percent of college students take six years to earn their degree instead of earning it in four years,” says Adrian Ridner, CEO and co-founder of Study.com. “Earning affordable college credit through online courses or College Level Examination Program (CLEP) exams can help you not only stay on track to make graduating on time more realistic, but it may even give you the opportunity to graduate early, which will cut down on your educational costs even more.”
The faster you graduate college, the less you’ll need in loan money, and the less you’ll pay overall for your education.
4. Pay the loan back
While you shouldn’t borrow more than you need in the first place, if you do end up with extra money after all your college expenses are paid for the year, use the surplus to pay back the loans with higher interest rates to decrease the amount of money that will be owed in the future. This also lowers your average student loan interest rate, which saves money in the long run. (See also: How Joe Mihalic Paid Off $90K of Student Loans in 7 Months)
5. Hand the money over to your parents
If you’re not paying for your own college education, that extra student loan money isn’t yours. So if you receive a check because there’s overflow, you ought to hand it over to your parents, grandparents, or whoever’s footing the bill so they can reduce their own financial liability. You’re not entitled to it, and you shouldn’t have it without their permission.
6. Return the money to the Department of Education
You could also return the check for federal student loans to the Department of Education, and the amount will get taken off your loan balance.
“You won’t have to pay any interest, and it will be like you never borrowed the money in the first place,” says personal finance expert Rebecca Saffer. “You typically have between 30 and 120 days to return the money from the date it was disbursed.” (See also: 11 Unique Ways Millennials Are Dealing With Student Loan Debt)
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