What Kinds of Financial Aid Do Students Have to Pay Back?

When it comes to paying for college, families have many financial aid options. But they should keep in mind that the type of aid received will determine whether it needs to be paid back. Students have to pay back financial aid if it is in the form of a loan, but they do not have to pay back grants, scholarships or money awarded through a work-study program.

Students eligible for grants or scholarships should exhaust those options before taking out any loans, experts say. But for many families, those kinds of financial aid aren’t enough. An average of 66 percent of graduates from the class of 2017 took out loans to pay for college, according to U.S. News data, and they borrowed nearly $30,000 on average.

With the nation’s student loan debt now reaching about $1.5 trillion, Marty Somero, director of financial aid at the University of Northern Colorado, says students are often responsible for researching loans and repayment plans, which can unintentionally lead to excessive debt.

“Students are confused by the various options,” Somero says, noting that some end up collecting so many loans they lose track of creditors and amounts owed. “It’s going to take a lot of legwork and a lot of reading online for an individual to determine what is their best course of action for repayment.”

To help ease the burden, Somero says an institution’s financial aid office can answer common questions and provide counseling, and the U.S. Department of Education‘s website provides information on federal financial aid options.

Grants are typically awarded by the federal government, states or colleges and are usually based on financial need. For example, the Pell Grant and Federal Supplemental Educational Opportunity Grant, or FSEOG, are available to undergraduate students with significant financial need. To be eligible for most grants, students must file the Free Application for Federal Student Aid, known as the FAFSA.

Scholarships are typically awarded for merit, athletic talent or other student achievements and characteristics.

Aid provided through the federal work-study program also does not have to be repaid. Students should keep in mind, though, that they are required to work, typically on campus, to receive their hourly wage.

To be considered, students must submit the FAFSA and indicate they are interested in federal work-study. Whether students receive work-study depends on factors like their financial need and how much work-study funding a school received that year, so the Department of Education recommends students submit the FAFSA early to increase their chances.

A student’s financial aid package, including loan options, will be detailed in his or her financial aid award letter. The letter can be another point of confusion, as some institutions don’t clearly differentiate between financial aid that does and does not have to be paid back.

“When you get your award information from the school, whether it be online or on paper, make sure when you are reading you know if it’s a loan that needs to eventually be repaid or a scholarship or grant, which is just free money, or if it’s work-study. Some students think that’s just free money, but students actually need to work for that money,” Somero says.

Student loans are a form of financial aid that must be paid back. Loans for college come in many forms, including different types of federal and private loans, and repayment options vary.

To apply for a federal loan, students must first submit the FAFSA. Based on the results of a student’s FAFSA, a school will send him or her a financial aid offer, which may include federal student loans. Federal loans are typically the best deal, experts say, as the interest rate is fixed, students generally don’t need a co-signer and the loans do not have to be repaid until after the student leaves or graduates from college.

However, in recent years an increasing number of students are being forced to go beyond federal loan options to pay for education-related expenses, says Kim Cole, a certified financial educator and community engagement manager for Navicore Solutions, a nonprofit financial counseling company headquartered in New Jersey.

“First and foremost, the federal student loans are the ones you want to exhaust first,” she says. “But unfortunately, we’ve come to a point in college where federal loans will not cover the entire amount of the tuition, room and board, and some of the additional costs. So at that point I recommend looking at your own bank, and trying to find a student loan with a low interest rate, preferably a fixed interest rate if at all possible.”

Private student loans can have fixed or variable interest rates. These loans are credit-based, meaning the interest rate will depend on the student’s and family’s credit, Cole says. The amount and process for paying back private loans can vary widely, but Cole urges students to exercise caution and contact financial aid officers for help.

“A private student lender doesn’t have to offer a single payment option other than your payment is due and that is it,” she says. “Read the fine print when it comes to these loans. When you are a younger student, you may just be excited to be getting the money, but also you may not understand compound interest and some of that language used in the packages. So if (students) don’t understand, they need to speak to someone. Do not trust the lender themselves to do the explaining.”

There are some instances, though they are rare, when students may not have to pay back all of their loans.

Some federal loans may be forgiven if a student goes on to work in certain jobs. Those who work full time for nonprofits or government organizations at the tribal, local, state or federal levels may be eligible for Public Service Loan Forgiveness. Under PSLF, the remaining loan balance is forgiven after the borrower makes 120 monthly payments under a qualifying repayment plan.

“There are some student loan forgiveness programs out there, especially for education majors if they work in some of the lower-performing schools and in certain areas,” says Paul McKinney, director of financial aid at Mississippi State University. “It’s not very common, but it is out there.” Under the Teacher Loan Forgiveness Program, those who teach full time for five consecutive academic years in a low-income school or educational service agency may be eligible for forgiveness of up to $17,500.

A federal loan may also be discharged, meaning the borrower is no longer required to make payments on the loan, in the case of death or total and permanent disability.

Through income-driven repayment plans, students may also be eligible to have the remainder of their federal student loans forgiven after making payments for 20 to 25 years. Other options for student loan relief exist for members of the military, in situations of a school’s closing and employer- or state-specific programs.

When a student must begin paying back financial aid depends on the type of loan borrowed.

Some federal student loans give students a six-month grace period after they leave or graduate from college, or drop below half-time enrollment, before repayment must begin.

There’s also a loan’s interest to think about. Subsidized federal loans are offered to undergraduates with financial need, and students don’t start owing interest until after leaving college. Other federal loans are unsubsidized, meaning a student must begin paying interest as soon as they take out the loan. If a student does not pay interest on an unsubsidized loan while in school, it will accumulate and be added to the principal of the loan.

Experts say in general students should take out subsidized loans first. Private student loans are typically not subsidized.

The federal government offers student borrowers a total of eight different loan repayment plan options. If a borrower doesn’t choose a specific one, the loans will automatically be placed in the 10-year standard repayment plan.

Each of the eight plans offers a range of monthly payments and time frames from 10 to 25 years. Specific kinds of federal loans are eligible for certain plans, and Cole says students should speak with their student loan servicer, who is responsible for collecting loan payments, to review the options and select the best choice.

By the time a student must begin paying back the loans, it may be too late to make arrangements to tackle the debt. Experts recommend thinking through repayment options as early as possible.

“They should be thinking about (repayment) before they take out the loans,” McKinney says. “One of the things we have found is that students wait until the end of four years to figure out, ‘How much do I owe. How much did I borrow?’ But students need to be understanding this upfront.”

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.