Stuck in student loans? Don’t blow your tax refund — here are 4 smart ways to spend it

Student loans are no joke. The average borrower has a debt of $36,614 across at least three different loans. It’s little wonder that student debt is the second-largest source of consumer debt in the United States, right behind mortgages.

The silver lining? ‘Tis the season of taxes, which could remove a sizable dent in your balance. Here are four ways to make the most out of your tax refund and shore up your financial health:

1. Pay off high-interest debt

If student loans are your highest-interest debt, a windfall of cash would be well spent on paying down your balance. This translates to a lump-sum payment you can direct right toward your principal balance.

Keep in mind that logging into your loan service website and making a bigger payment may not be enough. Some providers treat it like an early payment for your next installment due, so that money could end up going toward outstanding fees or interest. And if you have multiple loans, it could spread across all those balances, essentially diluting your efforts. Make sure you double-check with your loan provider that the money will be go toward your principal balance.

2. Refinance to invest in your future

Refinancing your student loans is a great way to make your payments more manageable. When you refinance, you use one loan to pay off multiple outstanding balances. You’ll also have new repayment terms and, hopefully, a lower interest rate.

Typically, you can refinance both your federal and private student loans together. (Warning: When you refinance, your new loan will be from a private lender, so you may lose federal protections like income-driven repayment plans, loan forgiveness and deferment or forbearance).

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3. Pay off loans and still treat yourself

Being too hardcore about paying off your student loans leaves little room for, well, life. And depriving yourself of little pleasures may actually make you more likely to backslide and slip up. If you can financially afford it, use just a portion of your refund to pay off student debt and the remaining amount for reasonable splurges that’ll make life an enjoyable experience.

You could even use the money to start a side business or passion project. Whether it’s selling handmade crafts on Etsy or launching your own blog, you can monetize your hobbies and turn them into long-term passive income streams. Remember: There’s nothing wrong with treating yourself. In fact, it’s vital to your long-term success. The trick is to find a healthy balance that doesn’t derail your big-picture financial health.

4. Bulk up your emergency fund

Lastly, it’s important to note that financial safety nets are vital — even if you have a big student loan balance. The point of having a solid emergency fund is to be able to quickly access it in an emergency (i.e., an unexpected car repair, medical bill or job layoff), so having it tied up in your 401(k) isn’t ideal. Instead, consider parking it in a high-yield online savings account.

Most experts agree that saving up an emergency fund that’s equal to three to six months’ worth of expenses is a good cushion, butmore isalways better. That means if all your monthly bills add up to $3,500 per month, you should aim to gradually sock away $10,500 to $21,000. (Don’t panic; you won’t get there overnight. At the end of the day, having just $1,000 on hand could get you through your next hiccup.)