It may be tempting to use student loans for a lifestyle upgrade, but smart students will instead direct their extra financial aid toward covering their bare-essential living expenses or building an emergency fund. And the brightest of the bunch will actually give the extra dough back to its lender.

Okay, so your tuition and study materials are covered, and (luckily) you still have some money left from your financial aid package. You’re all…

Girl in fur hat saying 'I'm rich'


But now the question is: What should you do with your leftover financial aid? Spend it? Save it? Let’s run through your options now.

What to Do with Excess Financial Aid

There are three smart moves you can make with excess financial aid: Give it back; use it to cover living expenses; or save it for a rainy day. Let’s cover the scenarios where each of those might make financial sense.

Give It Back

While it may be tempting to keep excess financial aid for yourself, there are also good reasons to consider giving it back.

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For one, excess financial aid isn’t free money (unless you received a grant or scholarship of some kind). You WILL pay back the money you borrow — and there will be plenty of interest tacked on to boot.

So why not give back what you don’t need? Not only will this help you graduate with less debt, but it’ll help lower the monthly payments you’ll be responsible for when you graduate.

It might feel strange to refuse what feels like an extra financial cushion. But considering it takes the average person 20 years to pay off their student loan debt — with an average monthly payment of $460 — your future self will definitely thank you.

Read more: How Student Loans Work

Use It to Cover Your Living Expenses

There are a lot of expenses you have to cover on top of tuition, fees, and books — especially if you’re living off campus. You may have rent to pay, utilities, groceries, a phone bill, car insurance, and more.

Using your excess financial aid, scholarships, and grants to get ahead on some of these expenses can give you some breathing room if times get tight.

MU30 Tip: You may have to pay taxes on any excess aid you don’t use for school-related expenses. You can read up on the details on the IRS website.

Save it for a Rainy Day

We get it, you want to enjoy your college years and not have to worry about money. But remember, things happen. You may lose your part-time job, encounter an unexpected medical expense, or need to replace a 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 aid, consider stashing it in a high-yield savings account, such as Discover Online Savings or CIT Savings Builder. Both have no monthly fees and earn an average interest rate that’s at least five times higher than what you’d find at a traditional bank.

Read more: Best High-Yield Savings Accounts Compared

What NOT to Do with Excess Financial Aid

While there are plenty of good things you can do with excess financial aid, there are also a few things you absolutely shouldn’t do. Here are three biggies.

Invest It

On the surface, investing excess financial aid sounds like a GREAT idea. If the average stock market return is 10%, why not invest the money and pocket the difference?

But in reality, it’s super risky. Let’s cover a few reasons why.

First, going into debt to invest is never a good idea. The stock market is already risky business. And when you take those risks on borrowed money, the consequences can multiply if it doesn’t pan out.

Second, no one can predict how the stock market will move. It may produce 10% returns on average, but this is just an average. In reality, the stock market swings wildly from one year to the next. It may be 15% one year, -10% another, and 5% the next.

The last thing you want to do is invest your excess financial aid, then have to start repaying it when the market’s down 10%.

And lastly, investing your student loans isn’t technically illegal, but you could still get in trouble if you get caught. For instance, students who invest subsidized federal loans could have to repay all the interest the government covered while you were in school.

Likewise, some private lenders may have stricter rules on what you can and can’t do with excess aid. So it’s always best to play it safe.

Read more: Is Using a Personal Loan to Invest in the Stock Market a Good Idea?

Blow It on Fun Things

Using your excess financial aid to fund a lavish lifestyle — like spring break trips, cute clothes, and fancy apartments — is another thing you don’t want to do. Not only does it solidify bad financial habits, but it could end up ruining your finances for decades.

There are tons of stories online about students who took out the max amount of loans every semester, only to default on those loans after graduation because the payments were way too high. As a result, it’s nearly impossible for them to buy a house, get a car, or even take out a credit card.

Of course, defaulting on a loan is a worst-case scenario. But still, saving up for fun things in college (versus using excess aid to cover them) will help you build a strong financial footing that will benefit you for the rest of your life.

Read more: This Is What Happens If You Don’t Pay Your Student Loans

Pay Off High-Interest Debt

The average student loan has a 5.8% interest rate. By contrast, the average credit card can have an interest rate around 18% — nearly three times higher. Looking at those numbers might make you think it’s a smart move to use a low-interest student loan to pay off a higher-interest debt.

But using student loans to cover high-interest debt is only a temporary solution to your debt issues. Budgeting, living within your means, and maximizing your income opportunities are long-term solutions that should be completely exhausted before you pay debt off with more debt.

What’s more, in the event that your finances go completely awry, know that declaring bankruptcy can absolve you of your responsibility to repay most forms of high-interest debt (like credit card debt). But federal student loans are typically only discharged if you file a separate action called an adversary proceeding, which is notoriously difficult to obtain.

Read more: How to Get Out of Debt on a Low Income


There are lots of things you could (and shouldn’t) do with excess financial aid. But the smartest move is usually to return it back to the school/lender.

That said, 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 more information and help you make the best decision for your situation.

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About the author

Cassidy Horton
Total Articles: 52
Cassidy Horton is a finance writer who specializes in banking and insurance. She earned her MBA and bachelor’s degree in public relations from Georgia Southern University — and has since published hundreds of finance articles online for Forbes Advisor, The Balance, Money,, and more. When she's not helping Millennials and Gen Zers gain control of their finances, you can find Cassidy hiking around the Pacific Northwest, cuddling her two cats, and eating way too much fried chicken. Connect with her on or LinkedIn to see what she’s up to next.