Can You Keep Extra FAFSA Money? And What to Do With It

The Free Application for Federal Student Aid (FAFSA) helps students access financial assistance for higher education. Through FAFSA, individuals can determine their eligibility for federal grants, scholarships, work-study programs, and federal student loans. The primary objective of these FAFSA funds is to help alleviate the financial burden associated with the cost of attendance at eligible educational institutions.

Understanding FAFSA Aid Disbursement

Financial aid awarded through the FAFSA process is disbursed directly to the college or university. The institution first applies these funds to cover direct educational expenses. These direct costs commonly include tuition, mandatory fees, and any charges for on-campus room and board if the student resides in university housing.

Once these direct institutional charges are satisfied, any remaining balance of the disbursed aid is then processed as a refund to the student. This surplus amount is what is often referred to as “extra FAFSA money.” Students receive these refunds through direct deposit or a mailed check.

Permissible Uses of Excess Funds

Any excess FAFSA funds refunded to a student are intended to cover legitimate educational expenses, aligning with the overall cost of attendance determined by the student’s institution. These permissible uses extend beyond tuition and fees to include various necessary outlays for a student’s academic pursuit. Funds can be used for the purchase of required books, essential supplies, and specialized equipment directly related to coursework.

The refunded money can also help cover transportation costs incurred while attending school, such as fuel, public transit fares, or vehicle maintenance. Personal expenses that are directly related to maintaining a student’s basic living needs during enrollment are permissible. This can encompass costs for toiletries, laundry services, and even reasonable entertainment. For students living off-campus, the excess funds can be applied to housing expenses like rent, utilities such as electricity and internet, and other associated living costs. If a student requires child care services to enable their attendance in classes or participation in academic activities, these expenses can also be covered by the refunded FAFSA aid.

Improper Uses and Consequences

Federal financial aid is not intended for non-educational or luxury expenditures. Using these funds for items such as personal vacations, high-end electronics unrelated to academic needs, or excessive entertainment expenses constitutes an improper use. Paying down credit card debt that is unrelated to qualified educational expenses is not a permissible use of FAFSA funds.

Misusing federal financial aid can lead to repercussions for the student. A common consequence involves the requirement to repay the misused portion of the aid. Students found to have misused funds may also face a loss of eligibility for future federal financial aid. In instances involving deliberate fraud, legal action may be pursued by federal authorities.

Tax Implications of FAFSA Funds

The tax treatment of FAFSA funds varies depending on the type of aid received and how it is utilized. Grants and scholarships are not considered taxable income if they are used for qualified education expenses. These qualified expenses include tuition, fees, books, supplies, and equipment required for enrollment or courses.

However, any portion of a grant or scholarship that is used for non-qualified expenses, such as room and board, travel, or optional fees, is considered taxable income. Federal student loans are not included in taxable income because these funds represent a debt that must be repaid. For specific tax guidance, individuals should consult IRS Publication 970, “Tax Benefits for Education,” or seek advice from a qualified tax professional, as individual circumstances can affect tax obligations.