Do You Have to Pay Financial Aid Back?
In order to comprehensively answer this question, a student must understand what type of aid they have received. A financial aid package may include different forms of aid, including:
- Federal grants
- Federal loans
- State grants
- Federal Work-Study program
- Private loans
To be clear, grants and scholarships do not have to be repaid, so these are ideal sources of student aid. Grants and scholarships are based on need, merit, or a combination of both, and they can be considered gifts. On the other hand, whether loans are federal or private, they must always be repaid. Federal Work-Study is a unique type of aid because you are not provided with the funds outright. With Work-Study, a student must find a school-based work-study approved job and earn the funds. This form of aid helps a student to have pocket money for expenses while in school.
Types of Loans
It is important for students to understand how to read a financial aid package. To make the process as easy to understand as possible, students should be aware of the different federal forms of aid. As Federal Student Aid details, there are two main types of federal loans, Direct Loans and the Perkins Loan (note that Stafford Subsidized and Unsubsidized loans have been discontinued).
Direct Loans include subsidized and unsubsidized loans, and an undergraduate can borrow them directly. The amount of a subsidized loan offer is based on a student’s financial need whereas unsubsidized loans are not. Parents of dependent undergraduates may borrow a PLUS Loan (also available to graduate students directly). The Perkins Loan is available to students who demonstrate low-income on the Free Application for Federal Student Aid (FAFSA). It is important to note that not all schools participate in the Perkins Loan program, and students should inquire with schools of interest for further information.
The good news for federal loan borrowers is that the government has created a repayment program that is sensitive to the borrower’s income. A borrower in repayment may benefit from one of these plans compared to the traditional ones (such as the standard repayment plan). As Federal Student Aid explains, certain loans are eligible for these helpful income-sensitive plans, which include:
- Pay as You Earn Repayment Plan
- Income-Based Repayment Plan
- Income-Contingent Repayment Plan
In addition, some graduates who work for the public good may qualify for Public Service Loan Forgiveness (PSLF). This program requires that 120 payments be made on eligible federal loans and then the balance will be forgiven (provided all the program’s conditions are met). While federal loans do have to be repaid under the PSLF, the good news is that some qualifying public service borrowers may not have to repay the entire amount.
Private student loans are not as flexible as federal loans, and do not offer forgiveness (nor do they have an incentive to do so as these loans are for-profit). Student loan lenders do have repayment plans and may even offer deferment (permission to delay payments for a set period without risking default). Private student loan borrowers who are interested in learning more about repayment options must contact the lender directly.