You must pay back any financial aid you received in the form of a loan. These may be federal or private student loans, each of which has their own repayment schedules. On the other hand, if you received financial aid as a grant, scholarship, or work-study program, you do not have to repay these funds.
With the rising cost of higher education, many people can’t afford to cover the costs out-of-pocket. Recent data shows that 66% of college students apply for federal financial aid through the Federal Application for Student Financial Aid (FAFSA). This number doesn’t even include those who take advantage of private aid.
If you’re planning to apply for financial aid, it’s important to understand what your responsibilities are. Financial aid from the federal government and private sources come with different terms and repayment options, and some may not require any repayment. Keep reading to learn more about alternative financing options, including those that don’t require repayment.
Do you have to pay back financial aid?
The answer to this question largely depends on the kind of financial aid a student received. If you receive a loan, either from the government or from private sources, you’ll have to pay back that aid after you leave school.
On the other hand, there are other types of financial aid that don’t have to be repaid such as grants and scholarships. While these options feel like free money, this kind of financial aid often comes with strict qualifications you must maintain while in school.
What kinds of financial aid do you not have to pay back?
As we mentioned, there are certain types of aid that you won’t have to repay after you leave school. Some of this aid is free based on your family’s finances or your academic achievement, but some you earn by working while in school.
A grant is a type of gift aid that doesn’t have to be repaid. Federal governments, state governments, colleges, and private organizations all offer grant money that you may apply for.
The most popular grant available is the Federal Pell Grant, which awards undergraduates who have exceptional financial needs and haven’t earned a bachelor’s or advanced degree before. How much aid you receive is based on your family’s financial situation, but you could earn up to $6,495 per school year.
Other federal grants include the Iraq and Afghanistan Service Grant (IASG) and the TEACH Grant.
- Iraq and Afghanistan Service Grant. The IASG is available for any students whose parents died in military service in Iraq or Afghanistan.
- TEACH Grant. This grant is ideal for those who agree to fulfill a teaching service obligation after graduation. However, if you fail to follow through with your end of the agreement, the grant converts into a student loan that you must repay.
A scholarship is similar to a grant in that it’s a type of free financial aid that you won’t have to pay back after you leave school. There are a few key differences between these types of aid.
First, while most grants come from the government, scholarships are generally offered by schools, companies, and private organizations. Additionally, while federal and state grants are often need-based, scholarships are usually (though not always) merit-based.
There are thousands of private scholarships available for many different purposes, including:
- Academic achievement
- Athletic achievement
- Community service
- Area of study
- Employer of your parents
- Family background
While scholarships don’t have to be repaid, some may have certain strings attached to them. For example, a scholarship may require that you remain in a certain major or maintain a certain GPA. If you don’t meet those requirements, you risk losing the scholarship for future years.
The federal work-study program allows a student to earn money for college by working a part-time job while he or she is in school. Like many grants, federal work-study is based on financial need. Students may earn a maximum income amount and can work as many hours as it takes to reach that maximum.
The work-study program provides for both on-campus and off-campus jobs, where most off-campus work is generally with a non-profit organization or government agency. In all cases, there’s a focus on employment in civic education and the public interest.
Just like the income from any other job, the income from your work-study job is money you’ve earned through work. As a result, you never have to pay it back.
What types of financial aid need to be paid back?
We’ve talked about the types of financial aid you don’t have to repay, but it’s just as important to talk about the types you do. In most cases, a student loan is the only type of financial aid you’ll have to repay, but they come in many different forms.
Federal student loans
The federal government offers student loans as a form of financial aid. Some types of federal student loans are need-based, while others aren’t. Here are some of the types of federal loans available:
- Direct subsidized loan. This need-based student loan is available to eligible undergrad students with loan amounts capped at $12,500 per year. Borrowers of these loans aren’t required to show creditworthiness.
- Direct unsubsidized loan. This direct loan isn’t need-based and is available to undergraduate, graduate, and professional students. Borrowers of these loans also aren’t required to show creditworthiness.
- Direct PLUS loans. These loans are made either to graduate and professional students or the parents of undergrad students. These loans aren’t based on financial need, but borrowers are required to show creditworthiness.
- Direct consolidation loan. This loan is available to students who have left school and wish to combine all of their federal student aid into a single loan.
Private student loans
While federal student loans tend to offer more favorable terms, not everyone qualifies for such aid. In that situation, you may turn to the many private lenders that offer student loans.
Unlike many federal loans, private student loans all require borrowers to show creditworthiness. Since many student loan borrowers are young adults with limited credit history, you may need a parent to cosign your loan. These loans also aren’t based on financial need.
How and when do you have to pay back student loans?
The process for repaying your student loans depends first on the lender, and federal and private loans have different rules. For instance, if you borrowed money from a private lender, then that lender can set your student loan repayment rules.
Federal student loans
If you have a federal loan, you have access to considerably more flexible and borrower-friendly repayment options with fixed interest rates. You won’t have to start making payments on your loans until six months after you leave school or drop below part-time enrollment.
When it’s time to start making payments, you’ll be able to choose between several different repayment plans. Here are some of your options:
|REPAYMENT PLAN||REPAYMENT TERMS||ELIGIBILITY|
|Standard Repayment Plan||Fixed payments to pay off your loan within 10 years||All borrowers|
|Graduated Repayment Plan||Payments that start low and increase every two years to pay off your loan within 10 years||All borrowers|
|Extended Repayment Plan||Fixed or graduated payments to pay off your loans within 25 years||Direct Loan borrowers with more than $30,000 in loans|
|Revised Pay As You Earn Repayment Plan (REPAYE)||Payments are 10% of your discretionary income, with the remaining balance forgiven after 20 years (or 25 for graduate loans)||Borrowers with direct subsidized loans and direct unsubsidized loans, as well as those with PLUS loans to the student|
|Pay As You Earn Repayment Plan (PAYE)||Payments are 10% of your discretionary income, but never more than you would have paid under the Standard Repayment Plan||All borrowers after 2007|
|Income-Based Repayment Plan (IBR)||Payments are either 10% or 15% of your discretionary income, with the remaining balance forgiven after 20 years (or 25 for graduate loans)||Borrowers with a high debt relative to their income|
|Income-Contingent Repayment Plan (ICR)||Payments are 20% of your income or the amount you would pay on a fixed payment over 12 years, with the remaining balance forgiven after 25 years||Borrowers with direct subsidized loans and direct unsubsidized loans, as well as those with PLUS loans to the student|
Private student loans
Many private lenders don’t require you to start making loan payments until you graduate, and they may even offer a six-month grace period after you leave school. Other private loans may require monthly payments to start immediately.
It’s important to read your loan terms — especially the repayment rules — before borrowing a private loan. If your payments aren’t manageable, consider refinancing your student loans to lower your monthly payment.
Can I get my student loans forgiven?
In almost all cases, you’ll have to repay the student loans you borrow. However, the federal government does offer certain student loan forgiveness programs to eligible borrowers.
As the table above indicates, you may have your federal loans forgiven if you’re on one of the income-driven repayment plans and make payments for 20 to 25 years. However, there are a few situations where you can have your loans forgiven even sooner. Those opportunities include:
- Job-based forgiveness. If you work for a government or non-profit organization for 10 years (known as public service loan forgiveness) or teach in a low-income school for 5 years, your loans may be forgiven. (Forgiveness through teaching is limited to $17,500.)
- Fault forgiveness. To receive this kind of forgiveness, you must prove that your college or school did not fulfill its obligations or responsibilities in some way. This may be because the school you attended closed while you were enrolled or soon after you withdrew funding. Your school falsely certified your loan eligibility. You withdrew from a school that failed to return your loan to the servicer.
- Reasonable cause forgiveness. Your lender may forgive your loans if you become totally and permanently disabled or if you declare bankruptcy (although forgiveness, in this case, is extremely rare). Your PLUS loan may also be forgiven if you, or the student on behalf of whom a PLUS loan was borrowed, die.
Student loan refinancing
Note that if you refinance federal loans you will make them ineligible for federal loan programs including Public Service Loan Forgiveness and Teacher Loan Forgiveness. Some borrowers are not comfortable with losing this protection and avoid student loan refinancing. This makes a lot of sense if you are concerned about losing your job or you’re likely to get a pay cut because private lenders don’t offer as much support if you get into financial difficulties. However, student loan refinancing can save you a lot of money if you have good credit score and a solid income (or you’re on a career track that is likely to provide it).
What happens if you can’t pay back financial aid?
If you’re unable to make the minimum payments on your student loans, reach out to your loan servicer as soon as possible. Federal student loans have options for deferment and forbearance for borrowers facing financial hardship, as do some private loans.
Is FAFSA free aid or a loan?
FAFSA is not a form of financial aid but instead the form you fill out to determine how much financial assistance you are eligible to receive. Through this application, a student may learn how much financial aid they may receive in a loan as well as what grants, scholarships, and work-study programs they are eligible for.
Do you have to pay back FAFSA if you fail?
Whether you have to repay your financial aid has nothing to do with your performance in school. However, poor performance could cause you to lose eligibility for future financial aid.
On the other hand, if you have to leave school or are expelled, you may have to start repaying your student loans right away.
Can my student loan be forgiven due to COVID?
There aren’t currently any student loan relief programs or policies specifically related to COVID-19. However, student loan interest and payments have been paused since the start of the pandemic.
- Some types of federal and private aid, including grants, scholarships, and work-study, are either free or earned aid. This means students won’t have to pay the funds back after school.
- If you borrow student loans, either from the federal government or a private lender, you will have to repay those funds when you leave school.
- The repayment rules for your loans will depend on whether it’s a federal or private loan, as well as the type of loan you have.
- In some cases, federal loans may be eligible for forgiveness based on your occupation, the school you attended, a disability, or other reasons.
View Article Sources
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- Personal Loans: Secured vs. Unsecured — MyCreditUnion.gov
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- How to Get a Private Student Loan Without a Cosigner — SuperMoney
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- Best Personal Loans for Students | March 2022 — SuperMoney