Students new to financial aid sometimes ask whether they will have to pay back the money they receive from filling out the FAFSA. The FAFSA is the Free Application for Federal Student Aid. This free application form is used to apply for federal student aid and financial aid from state governments and most colleges and universities.
FAFSA is not financial aid itself; it is just an application, so you do not have to pay anything back. However, students may use the term FAFSA to refer to the financial aid awarded after the student files the FAFSA.
Read on to learn whether you need to pay back FAFSA aid.
How Financial Aid Is Awarded
The financial aid office awards federal student aid at your school based on the FAFSA application, including the Federal Pell Grant, Federal Work Study, and federal student loans. The FAFSA also awards state and institutional grants from colleges and universities.
Once you fill out the FAFSA, you can send that application to any school you choose. That school will take your information, assess your eligibility for certain types of aid, and provide you with a financial aid letter detailing what types of financial aid you’ve been approved for and your total expected out-of-pocket cost to attend the school.
It’s important to point out that the FAFSA application is just that—an application. It is an easy way to process your information and streamline the financial aid process for every school. Neither the FAFSA nor those who oversee it provide any direct financial aid in the form of grants or student loans.
Types of Financial Aid You Don’t Need to Pay Back
You don’t need to repay all types of financial aid you receive. When you fill out the FAFSA, you get verified to receive all kinds of money for college, and a lot of it is money you earn, or that is awarded to you that isn’t repaid. Here are the types of financial aid you don’t have to pay back:
- Grants: A grant is essentially free money for you to go to school that is awarded for a specific purpose. Federal grants are awarded based on financial aid, and there are other grants you can win or earn. One common type of grant is a Pell Grant.
- Scholarships: A scholarship is money earned for school that isn’t paid back. A good example is an athletic scholarship, which covers the tuition cost of going to the school in exchange for the student’s playing on a specific athletic team.
- Work/Study: Any money earned through a work-study program is earned and does not have to be paid back.
This is a quick list that represents the majority of the money paid out through the financial aid process that isn’t paid back.
What Types of Financial Aid Must Be Repaid
Student loans are the primary form of financial aid that must be repaid, usually with interest on top of the borrowed amount. For federal student loans, the government is your lender. These are typically in the Direct loan program and may be subsidized or unsubsidized. If your loan is a Direct subsidized loan, the federal government pays the interest while you are in school and during any grace period.
Interest on Direct unsubsidized loans begins to accrue immediately, and the federal government does not cover the interest. Subsidized loans are awarded based on a student’s financial need, while unsubsidized loans are not. Direct PLUS Loans made to parents and graduate students generally have higher interest rates than those made to undergraduate students.
One exception to repaying your student loans is if you’re eligible for student loan forgiveness. You may be eligible for forgiveness through the Public Service Loan Forgiveness program if you qualify for employment. You may also get forgiveness through income-driven repayment plans, which offer forgiveness after 20 to 30 years of monthly payments.
You do have to pay back financial aid in some cases, such as student loans awarded through the FAFSA process, but not all types of aid require repayment.
Who Do Students Pay for Student Loans?
When you agree to take out student loans as part of your federal financial aid package, you’ll be given a loan servicing company that actually provides the funds and manages your loan account.
This is who you will repay unless the servicing company transfers your loan to another servicing company before you enter loan repayment. If that happens, you’ll be notified.
Any loan you take out must be repaid, and you’ll likely be charged interest either as soon as you take out the loan or once you hit the repayment period. If you end up not using all of the money you borrowed for school, you can either return it or use it to pay down your balance.
Using a 529 Plan to Pay for College
If you’re in a position to start saving for college before you go or before your child goes, then that is always the best option. You can open a 529 plan and start growing the total account size by investing the funds through a tax-advantaged account. This gives your child the best chance at minimizing their total need for financial aid.
With 529 plan funds, you’ll never have to worry about borrowing or paying anyone back because it is money that you’ve saved and grown in the market. This is similar to putting money in your savings account and paying cash for school.
These 529 plans were specifically created to help college students save money and let it grow tax-free as they use the funds for qualified college expenses. You do not need to fill out the FAFSA to open a 529 plan.
The Bottom Line
The FAFSA is an application that you fill out so that the colleges you’re interested in or are attending can provide you with a financial aid award letter. This letter tells you what type of financial aid you’re approved for. If you receive student loans through this process, then that is money that you must repay directly to your assigned loan servicing company after you graduate.
Frequently Asked Questions (FAQs)
If you fail a class, do you have to pay back your FAFSA financial aid?
No, failing a class doesn’t mean you’ll be forced to pay back any money you received for that class. It could mean you’ll lose out on future money because you didn’t perform well. An example of this would be that if you fail a class and are on an academic scholarship, the school might take that scholarship away for the next semester.
If you take out student loans, you’ll be asked to repay that money even if you fail out of school.
Can FAFSA loan debt be forgiven or canceled?
The money you get through the financial aid process and filling out the FAFSA is the same as any other college financial aid process you’ve heard about before. This debt can be forgiven in certain circumstances, but it is pretty rare.
Can you earn scholarships outside of the FAFSA?
Many scholarships have nothing to do with how much you receive due to your FAFSA application. These scholarships are typically won for a specific purpose and could be from numerous types of companies or individuals awarding the money for college.
