May 16, 2019 12:00 PM PT

Do You Have to Pay Back Grants?

Read more about Student Loans

Grants can help with the high cost of college tuition. But do you need to pay them back? Read on to find out, plus different types of grants to help pay for school.

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Grants are a form of financial aid. Unlike student loans, they typically do not have to be repaid. But if the obligations have not been met, some or all of the grant must be paid back.

REQUIREMENTS FOR PAYING BACK GRANT MONEY

Grants are sometimes considered "free money." But they are NOT a gift. If you do not complete the qualifying circumstances, you will be required to return at least a portion of your grant.

Never spend grant money on anything other than the purposes intended.

Take federal grants, including Pell Grants, as an example. (We'll review each type of grant below.) You must repay a federal grant IF:

  • You withdraw from the program for which the grant was given to you.

  • Your enrollment status changed in a manner that reduced your eligibility for your grant (e.g., you drop from full-time enrollment to part-time, which reduces your eligible grant amount).

  • You received outside scholarships or grants that reduced the amount of your approved federal aid.

  • You did not meet the requirements of your grant (e.g., you must serve as a full-time teacher, and you must teach in a high-need field).

  • Your financial aid exceeded the cost of attendance by more than $300. This is called an overaward. Financial aid includes scholarships, grants, loans, and other assistance defined by the institution.

Grants can save you thousands of dollars in student loans. But just what are they and how do you get them? Keep reading to find out.

WHAT IS A GRANT?

Grant programs are a form of financial aid awarded for qualifying education expenses. There are two main types of financial aid: gift aid and self-help aid.

Gift Aid
Grants and scholarships are frequently called gift aid. Typically (but not always), they do not have to be paid back. Nor do they have to be reported as income on a tax return.

As such, grants are considered a free gift that lowers the cost of a student's qualified education expenses. They are issued by:

  • The federal government
  • Resident and non-resident state programs
  • The school you attend

The most common type of gift aid program is the Federal Pell Grant.

Self-Help Aid (or Non-Need-Based Aid)
Self-help aid is money awarded to students that must be paid back, either monetarily or through voluntary or work hours.

The two categories of self-help aid are:

  1. College and University Self-Help Aid: Work-study is a needs-based financial program offered through colleges and universities. This is supplemented by the federal government.

    Work-study is typically NOT applied directly to your tuition bill. Campus employment is a great self-help option. If your school has an employment program available, they may waive a portion of tuition in exchange for hours worked.

    Your school is the best resource for finding financial aid programs, especially those specific to your state.

    If you are not eligible for student loans or other types of federal aid or grants, colleges normally have gift aid programs that help lower the cost of your education.

  2. Student Loans Self-Help Aid: Student loans are a form of self-help that must be paid back over time at various interest rates.

    Federal student loans offer a variety of benefits, including:

    • Low or fixed interest rates
    • Payment restructuring options after graduation
    • A six-month grace period after graduation

    Federal direct loans cover a variety of financial needs. The three types of federal student loans currently offered are Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.

Start by pursuing free money options like grants and scholarships to pay for college. If you still need financial help, seek federal student loans.

As a last resort, you can take out a private student loan. These are not financial-need based, and they may be more difficult for you to obtain.

Private loans also don't have many of the benefits of federal student loans, such as deferment or forbearance, loan forgiveness, and low interest rates.

Wondering how you can get "free" grant money for college? Read on.

HOW TO OBTAIN A GRANT

The Free Application for Federal Student Aid (FAFSA) is the most important thing you can do to get financial aid for college. Complete and submit the application online.

Once completed, your information is automatically forwarded for state-awarded grants as well.

Use the FAFSA at the link above to reach the U.S. Department of Education Federal Student Aid website. Some scammers use similar-looking sites to steal your information.

To complete the application, you'll need:

  • Your driver's license and Social Security number
  • Your parents' Social Security numbers and birthdates
  • Your family's most recent federal income tax returns
  • Your W-2 forms
  • Bank statements
  • Family investment information (e.g., real estate, money market funds, stocks)

Processing will take about 3 to 5 days for online applications. If you mail a paper application, that time increases to 7 to 10 days.

Remember, FAFSA forms must be completed each year. You can find deadlines for submission here.

Keep reading for answers to common FAFSA questions.

FAFSA FAQ

How is federal financial aid eligibility calculated through the FAFSA?
The financial information that you submit through FAFSA is used to determine your Expected Family Contribution (EFC).

The EFC is an index number formulated using the law and the financial information you provide. Your school uses the EFC to determine how much financial aid you're eligible to receive.

When determining your financial aid package, the government also considers your:

  • Year in school
  • Enrollment status
  • Cost of Attendance (COA)

What happens after my FAFSA submission?
You will receive a Student Aid Report (SAR) from the office of Federal Student Aid. The SAR offers basic information about the data you submitted, as well as a report of the answers you provided on the FAFSA application. Your SAR will NOT tell you how much financial aid you are eligible for.

If you gave your email address when you submitted your FAFSA, you will receive your SAR within a couple of days of filing electronically. If you did not give an email address, you will receive your SAR within two weeks through the postal service.

Your SAR will also inform you if you are required to provide additional information to be eligible for federal aid.

Review your SAR to ensure your financial information is correct even if no additional information is required.

This will help you avoid costly mistakes, like having to pay back a grant. If your financial situation has changed since you submitted your FAFSA form, make any necessary edits and submit your corrected FAFSA for re-processing.

After getting your SAR, you will receive financial aid award letters from the schools that have accepted you. These letters tell you how much financial aid you are eligible for.

This aid may include:

  • Student loans
  • Grants
  • Scholarships

SAR will also indicate if you are eligible for work-study programs, Federal Pell Grant, and specific types of federal grants. Your school will assist you with the application for grants, including federal grants. You can also ask if there are institutions or state-based grants available that you may qualify for.

How Can I Find What Financial Aid I Qualify For?

Use the Department of Education free calculator. All you need to do is enter some basic information to get an estimate.

Learn more about federal student grant programs below.

FEDERAL STUDENT GRANT PROGRAMS

Several types of federal student grant programs are available.

Federal Pell Grant

  • Awarded to undergraduate students who have exceptional financial need and who have not earned a bachelor's, graduate, or professional degree.

  • Students may be eligible for a larger Pell Grant if his or her parent died in Iraq or Afghanistan or in the line of duty as a public safety officer.

  • Lifetime eligibility is limited to the equivalent of 12 semesters (the equivalent of roughly 6 years).

  • Maximum of up to $6,095 (for the 2018-19 award year).

Year-Round Federal Pell Grant
Students are usually eligible to receive 100% of the maximum Federal Pell Grant per year. This is typically divided up between two semesters.

In some situations, students are eligible for up to 150% a year when the summer semester is included in the qualifying grant year. This is called a Year-Round Federal Pell Grant.

Here's an Example:

If you are eligible for a $1,500 Pell Grant for the award year, and you are enrolled full-time for the fall and spring semesters, you'll likely receive $750 in the fall and $750 in the spring.

In certain circumstances, you may be eligible to receive an additional amount in the summer semester, up to $2,250 for the year, and $750 for the summer semester.

Federal Supplemental Educational Opportunity Grant (FSEOG)

  • Awarded to undergraduate students who have exceptional financial need and who have not earned a bachelor's or graduate degree.

  • Federal Pell Grant recipients receive priority over the FSEOG program.

  • Not all schools participate in the FSEOG program.

  • Funds are limited to school availability and applications must be received by the school's deadline.

  • Maximum of up to $4,000 year.

Teacher Education Assistance for College and Higher Education (TEACH) Grant

  • For undergraduate, post-baccalaureate, or graduate students enrolled in programs that prepare them to teach in a high-need field at an elementary or secondary school level.

  • Must service for a minimum of four years (within eight years of completing the program for which you received the grant funds) as a full-time teacher in a high-need field or educational service agency that services low-income students.

  • Failure to complete the teaching service commitment results in the grant being converted to a Direct Unsubsidized student loan that must be repaid.

  • Maximum of up to $3,752 for grants first disbursed on or after October 1, 2018 and before October 1, 2019.

Iraq and Afghanistan Service Grant

  • For students whose parent or guardian was a member of the U.S. Armed Forces and died as a result of performing military service in Iraq or Afghanistan after the events of 9/11.

  • Must be ineligible for Federal Pell Grant due to having less financial need than what is required to receive Federal Pell Grant funds.

  • Must have been less than 24 years old or enrolled at least part-time at a college or career school at the time of the parent's or guardian's death.

  • Maximum of up to $5,717.11 for grants first disbursed after October 1, 2018 and before October 1, 2019.

Looking to lower your student debt burden? Check out
10 Grants to Pay Off Student Loans.

COMMON QUESTIONS ABOUT GRANTS

How Will I Know if I am Reaching My Limit on Federal Grants?
You will receive notification from the Department of Education when you are close to your limit.

Am I Required to Report Grants that I Received on My Income Tax Return?
Income taxes must be paid on any grant or scholarship that exceeds the qualified education expenses.

How Do I Know if I am Meeting the Requirements for My Grant?
Visit the website relevant to your specific grant to ensure you meet eligibility requirements.

If you do not know how to find the website, or if you do not understand the requirements listed there, contact your school financial aid office.

What are State Grants?
State-specific grants are awarded on a similar basis as Federal Pell Grants. If you are eligible for a federal grant, you may also be eligible for a state grant.

When you complete an FAFSA application for student aid, the Department of Education forwards your information to the state student assistance agency. Every state has their own grant program in place. Some states, however, require you to submit a separate application in addition to the FAFSA.

Again, your school is the best resource for this. They will tell you if you must submit a separate application to your state for a grant.

State grants normally do not have to be paid back. You are also not required to report them as income on your tax return unless you do not use the grant for the educational purposes and expenses intended.

Research and apply for state grants. Each state has its own grant process in place. It's not uncommon to be awarded more state grant money than through the Federal Pell Grant program.

What is a Fellowship?
A fellowship is a type of grant awarded while you pursue specific academic interests. Most fellowships are awarded for post-graduate study, but they are also awarded for undergraduates.

Fellowships are considered prestigious awards. They are higher paying and fund opportunities for advancement. They may also cover qualified living expenses.

Because they are grants, fellowships follow pay back requirements under certain circumstances. You may be required to report the aid as income on your tax return.

Do you have additional questions specific to federal student aid, scholarship, grants, or program resources? Visit Federal Student Aid U.S. Department of Education for more information and a fact sheet.

Is it a requirement to report grants on a tax return? Keep reading!

Am I required to report grant money I receive as income on my tax return?
If your grant was for study or research in the pursuit of a degree, the money you used to pay your qualified tuition and related education expenses is NOT taxable. You are not required to report it on your tax return.

Grant money IS taxable and must be reported on the tax return under these conditions:

  • The grant was for general living expenses for a non-degree student.

  • The grantor requires the student to perform services in return for the grant.

  • The grantor requires the student to pursue studies or other activities mainly for the benefit of the grantor.

  • The grant has a condition that the student perform past, present, or future services for the grantor.

  • The services performed by the student are subject to the direction or supervision of the grantor.

In addition, if some or all of the funds are not used for the qualifying conditions of the grant, the money must be reported as income on your tax return.

For example, if you used your Federal Pell Grant to pay for room and board, and this is not a qualified education expense, the amount is considered taxable income. As such, it must be reported on your tax return.

HOW TO PAY BACK GRANTS

The Department of Education provides schools with software and worksheets to help calculate how much federal money students may owe.

If you have been overawarded, or if you have not met the required conditions of your federal, state, college, or university grant program, contact your school financial aid office. They will help determine exactly how much money you owe and how to pay it back.

Your school will typically notify you through a repayment bill if you must repay part of a federal grant due to an overaward. Your debt, if it is greater than $25.00, is turned over the Department of Education for collection. You will have 45 days to pay the overpaid portion of the grant in full.

Contact the Department and request a payment arrangement.
Phone: 1-800-621-3115.

If you do not act on these options, you will lose eligibility for additional federal student aid. You also run the risk of further collection activity, which might include wage garnishment and tax refund withholding.

If your school failed to follow required procedures, which then caused the overaward, the school must repay the overpayment.

How is a scholarship different from a grant? We explain below.

COMPARISON GRANTS VERSUS SCHOLARSHIPS

Like grants, scholarships are considered financial gift aid. But grants are typically issued by the government, usually federal, although some are awarded by state.

Scholarships are often issued by corporations, nonprofit organizations, schools, religious groups, private clubs, and individuals.

Most are merit-based, meaning they are awarded to undergraduate students who meet certain eligibilities. These include:

  • Academic Merit
  • Grade Level or Major Course of Study
  • Athletic Ability
  • Other Criteria (GPA)

Some scholarships are awarded based on financial need.

Check out 10 Biggest Scholarships in the World for a list of major scholarships offered by corporations. For example, Coca-Cola Scholars Foundation average amount awarded: up to $20,000. Davidson Fellow Scholarships average amount awarded: up to $50,000.

Scholarship checks are usually issued to the school and infrequently in the student's name. They can be paid in a one-time check before the school year. Other school scholarships are renewable each semester or school year.

If the scholarship check is issued in your name, your wisest move is to use the scholarship to lower your education expenses, but how you use it is totally your choice.

You are NOT required to pay the money back if you fail to meet the qualifying reasons the scholarship was issued. But the scholarship will end, meaning subsequent semesters or school years will not be funded.

Do I Have to Report Scholarship Money on my Income Tax Return?

If you used the money to pay for qualifying education expenses in the pursuit of a degree, you are NOT required to file it as income on your federal tax return.

However, if, for example, you used the money to pay for general living expenses, and if you are deemed a non-degree student, you must report the scholarship money as income on your taxes.

Bottom Line

Grants are considered "free money" toward college tuition. However, they do need to be repaid under certain circumstances.

Know the award stipulations before you accept aid and read all terms and conditions. Grants will not pay for 100% of the cost of your education, but they will lower your need for student loan debt.

More from CreditDonkey:


How to Get Rid of Student Loans


Grants to Pay Off Student Loans


How Do Student Loans Work

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