Do You Have to Pay Back FAFSA Financial Aid?

The Free Application for Federal Student Aid (FAFSA) is the primary method for students and their families to access federal funding for higher education. While the FAFSA itself is an application, not a direct source of money, it determines eligibility for various aid options.

What FAFSA Is and What It Does

The FAFSA collects detailed financial and demographic information from students and their families. This data is used by the U.S. Department of Education to assess a student’s capacity to pay for college. Colleges, states, and some private scholarship programs also utilize FAFSA information to determine eligibility for their own aid programs.

The FAFSA information is processed to calculate the Student Aid Index (SAI), which replaced the Expected Family Contribution (EFC). The SAI is a numerical value representing how much a student and their family might contribute to education expenses for a given award year. This index determines the type and amount of federal, state, and institutional financial aid a student may be offered. Completing the FAFSA is necessary each academic year to determine continued eligibility for federal student aid.

Financial Aid You Don’t Repay

Not all financial aid requires repayment. Grants are a common form of aid that do not need to be paid back. These funds are often awarded based on financial need, academic merit, or specific criteria.

Federal grants include the Pell Grant, which is awarded to undergraduate students with exceptional financial need. The Federal Supplemental Educational Opportunity Grant (FSEOG) is a campus-based grant for students with the greatest financial need. The Teacher Education Assistance for College and Higher Education (TEACH) Grant provides funds for students who agree to teach in high-need fields at low-income schools for a certain period. Failure to meet the teaching service requirement for a TEACH Grant can result in it converting into a loan that must be repaid with interest.

Scholarships, offered by institutions, private organizations, and states, do not require repayment. These can be based on academic achievement, specific talents, community service, or various other criteria. Federal Work-Study is another form of non-repayable aid, as students earn these funds through part-time employment, often in jobs related to their field of study or community service. Students receive regular paychecks for hours worked, which can then be used to cover educational or living expenses.

Financial Aid You Do Repay

Student loans represent the primary type of financial aid that must be repaid with interest. These funds are borrowed and are subject to specific repayment terms and conditions. Federal student loans are provided by the U.S. Department of Education and offer more flexible repayment options compared to private loans.

Direct Subsidized Loans are available to undergraduate students who demonstrate financial need. The U.S. Department of Education pays the interest on these loans while the student is enrolled at least half-time, during the grace period after leaving school, and during periods of deferment. This means interest does not accrue during these specified periods, reducing the total amount repaid.

Direct Unsubsidized Loans are available to undergraduate and graduate students, regardless of financial need. Unlike subsidized loans, borrowers are responsible for paying all accrued interest from the time the loan is disbursed. If interest is not paid while the student is in school or during grace/deferment periods, it capitalizes, meaning it is added to the principal balance, increasing the total amount owed. Direct PLUS Loans are federal loans available to graduate or professional students and to parents of dependent undergraduate students. Eligibility for PLUS loans involves a credit check, and these loans have higher interest rates than subsidized or unsubsidized loans.

Private student loans are offered by banks, credit unions, and other financial institutions, with terms and conditions set by the individual lender. These loans require a credit check and may necessitate a co-signer, especially for students with limited credit history. Private loans have variable interest rates and offer fewer borrower protections and repayment flexibilities than federal loans.

Managing Loan Repayment

Once students graduate, leave school, or drop below half-time enrollment, federal student loans enter a grace period, which lasts six months, before repayment begins. During this period, borrowers are not required to make payments, though interest may accrue on unsubsidized and PLUS loans. If no specific action is taken, federal loans are placed on the Standard Repayment Plan.

The Standard Repayment Plan involves fixed monthly payments designed to repay the loan in full over a 10-year period. While this plan results in the lowest total interest paid over the life of the loan, it may have higher monthly payments compared to other options. For those seeking lower initial payments, the Graduated Repayment Plan starts with smaller payments that gradually increase every two years, over a 10-year term. This plan assumes a borrower’s income will increase over time.

Income-Driven Repayment (IDR) plans adjust monthly payments based on a borrower’s income and family size. These plans can lead to payments as low as $0 per month for those with very low incomes.
There are several IDR plans:

• Income-Based Repayment (IBR)
• Pay As You Earn (PAYE)
• Revised Pay As You Earn (REPAYE)
• Income-Contingent Repayment (ICR)

While IDR plans offer payment flexibility, they can extend the repayment period, potentially leading to more interest paid over time. Any remaining loan balance may be forgiven after 20 or 25 years of qualifying payments, depending on the specific IDR plan.

Borrowers facing temporary financial hardship may also explore options like deferment or forbearance. Deferment allows for a temporary postponement of loan payments, and interest may not accrue on subsidized loans during this period. Forbearance also temporarily suspends or reduces payments, but interest accrues on all loan types during this time.

Federal loan consolidation allows borrowers to combine multiple federal student loans into a single Direct Consolidation Loan with one servicer and a new fixed interest rate. This can simplify repayment by reducing the number of monthly payments.