Cancel Student Loans to Save — and Receive an Interest-Free 120-Day Loan
Student loan debt is all over the news. There are concerns that student loans might be the next "bubble" and finger pointing by Congress, universities, and of course, students. There's a lot of blame to go around, but at the end of the day, you are the one who has to repay the debt. So, what's an easy way to have less debt?
Return money you don't need. In federal loan lingo, it's called "canceling" your loan. (See also: Student Loans: How to Make Post-College Decisions)
Buried deep in the Federal Loan documents, there's a provision that tells you, "before your loan money is disbursed, you may cancel all or part of your loan at any time by notifying your school."
But here's the better deal — "Within 120 days of the date your school disbursed your loan money (by crediting the loan money to your account at the school, by paying it directly to you, or both), you may return all or part of your loan to us."
So Why Would You Want to Return Part of Your Loan?
You want to return (aka cancel) your student loan because then you don't have to pay interest — even back interest that accrued since you took out the loan. Here's the official language:
You do not have to pay interest or the loan fee on the part of your loan that you return within 120 days of the date that part of your loan is disbursed. If you received an up-front interest rebate on your loan, the rebate does not apply to the part of your loan that you return. Your loan will be adjusted to eliminate any interest, loan fee, and rebate amount that applies to the amount of the loan that you return.
Any unsubsidized federal student loan starts accruing interest immediately, so the sooner you can pay back the money the better. And with Grad PLUS loan interest rates at 7.9% and origination fees of 4.0%, every $100 you return is saving you nearly $12 today (and more as the interest compounds). So when you get all interest accrued and fees paid returned to you, you've now got a 120-day interest-free loan.
Why You Would Need to Cancel Part of Your Loan
Now, I would never advocate taking out an interest-free loan for 120 days just for the sake of taking it. Instead, there are two really good reasons to cancel your loan.
1. You Took Out Too Much Money
One of the issues with student loans is that it's hard to figure out how large of a loan you need and easy to take out too much money. At the beginning of the school year when you make your loan elections, you might think you need $5,000 of spending money during the second semester, but by the time the loan gets dispersed in January, you realize you only need $3,000. Instead of blowing the extra $2,000 on clothes or rounds of drinks for your friends, do the responsible thing and cancel this money you don't need.
2. You Get Extra Money or Are Working During School
Many students (especially graduate students) work while going to school. So take part of your earnings for the first few months of each semester and use it return part of your loan money. Or perhaps you got lucky and receive an inheritance or some unexpected birthday cash. Instead of spending it all, cancel your loans and get your interest and fees back.
How to Cancel Your Loan
I've canceled multiple students loans because of earning more by working or taking out too much money in the first place. (One semester, my tuition dropped due to course load adjustments, so I was able to return a large part of a loan.) I've used the following two methods to cancel my loans.
1. Contact Your School's Financial Services Office
The easiest way to cancel your loan is to contact your school's financial services office and ask them to cancel all or part of your loan. If the money has only been disbursed to your student account (and not all the way to your personal checking account), the school can easily take the money back and return it to the government.
2. Contact the Direct Loan Servicing Center
If the loan has already been disbursed to your personal account from your school's student account, you'll most likely need to contact the Federal Direct Loan Servicing Center. My experience has been that they will tell you to send in the money to a payment address or "make a payment" online; then you'll have to follow up and tell them that they money was for a cancellation. I recommend calling them at 1-800-848-0979 and not emailing through myedaccount.com. Always use the term "cancellation" or "cancel." (I have had several experiences with email where the email reply has been that they made the adjustment, but the interest in my account still showed, resulting in me having to follow up multiple times. Calling has always resulted in the cancellation showing the first time.)
This student loan hack only works for federal loans and makes the most sense to use for unsubsidized loans where interest is accruing from day one. But it's a great way to lessen your debt burden after you finish school.
Have you ever canceled a loan within the 120-day period? What hacks have you used to lighten your student loan debt?