Do You Have to Pay Back Grants? It Depends

Let’s get straight to it: In most cases, you do not have to pay back grants.

The federal government awards grants to eligible students attending college or a professional school. Grants are usually free money, but you’ll want to ensure you meet the obligations of your grant — even after you’ve graduated.

Grants are different from loans and scholarships. Unlike student loans, you seldom have to pay back federal grants. Unlike scholarships, there are some situations where you might need to repay grant money.

Here’s a quick and easy guide to understanding how grants work and when you might need to repay them.

According to the U.S. Department of Education, a grant is known as “gift aid” or free money towards your college education.

There are 4 types of federal grants:

• Federal Pell Grants offer up to $6,500/year, mainly to undergraduate students who demonstrate financial need and don’t have a bachelor’s degree. These grants (originally called Basic Educational Opportunity Grants) are determined by your college’s financial aid office.

• Federal Supplemental Educational Opportunity Grants (FSEOG) cover up to $4,000/year, allocated for students who demonstrate considerable financial need. The grant amount is determined by your school’s financial aid office, depending on the college’s available funds. Not all schools participate in the FSEOG program. FSEOG is usually granted in addition to Pell Grant funds that have not met your financial need.

• Teacher Education Assistance for College and Higher Education Grants (TEACH) offer up to $4,000/year, given to teachers as long as they teach at a low-income school for 4 years.

• Iraq and Afghanistan Service Grants cover up to $5,500/year, established for children of service members who passed away during their service in post-9/11 Iraq and Afghanistan. You must not qualify for Pell Grants due to Expected Family Contribution but otherwise meet all eligibility requirements for the Pell Grant.

There are also state-issued grants that differ between each state government.

Grants are typically non-taxable income. Unless you perform services in return for grant money or use grant money for non-qualified education expenses, you do not have to report grant money on your income tax return.

Pro tip: Do not use Pell Grant money to pay for room and board. That is not a qualified education expense, and thus you have to report that money on your tax return.

What is the maximum grant that one can receive? The maximum grant you can receive is a Federal Pell Grant. If your parent(s) served as a military member in Iraq or Afghanistan and passed away while on active duty, that Pell Grant may balloon. You may be eligible for $6,345+.

You should not have to pay federal grants back, except in certain circumstances.

These are 5 examples of times you would need to repay grants:

1. You do not meet the obligations of your TEACH Grant by teaching in a low-income area for 4 consecutive years.

2. You withdraw early from a program, and your expected completion of the program earned you a grant.

3. You receive outside scholarships or grants that reduce your financial need.

4. You receive more than $300 over your cost of attendance — called an overaward.

5. You drop from a full-time student to part-time in the middle of the school year, or you drop out of a grant program part-way through. Half-time enrollment usually means half the grant money.

You do not need to repay grants most of the time. Only if you fail to meet certain obligations would you have to pay back federal grant money.

Here are the 2 most likely cases in which you must repay federal grant money, as well as when you need to repay it:

1. If you accepted TEACH grant money but later decided not to teach for 4 consecutive years in a low-income area, the TEACH grant turns into a Direct Unsubsidized loan that you must start repaying right away. Interest will be calculated retroactively.

2. Your school should notify you with a repayment bill if you need to repay grant money for any reason, such as an overaward or drastic change in enrollment status. If you don’t pay within 45 days, you may forfeit future federal financial aid eligibility until you pay.

How do you know if you are eligible for a grant? You know if you’re eligible for a grant after you complete the FAFSA (Free Application for Federal Student Aid). Then your school should send you a financial aid award letter that details what scholarships, loans, and grants you qualify for.

Generally, qualifying for federal grants involves demonstrating financial need.

To qualify for FSEOG, your Pell Grant award money must not be enough to cover your considerable financial need.

To qualify for the TEACH grant, you must promise to teach in a low-income area for 4 consecutive years after graduation. (Pro tip: Teachers are also eligible for the Public Service Loan Forgiveness Program after 10 years of on-time payments.)

To qualify for the Iraq and Afghanistan Service Grant, your parent(s) must have passed away while serving as an active military member in Iraq or Afghanistan post-9/11.

Grants are not the only form of financial aid. Scholarships and loans are arguably more common than grants.

What is the difference between a grant and a scholarship? Here’s the difference between a grant, a scholarship, and a loan:

• Typically, you don’t have to pay back grants, but there are specific requirements you must meet, lest you get saddled with a repayment plan you didn’t expect.

• Typically, you always have to repay loans.

• Typically, you never have to pay back scholarships.

Here are 7 other types of financial aid you need to know about:

1. Direct Subsidized Loans: The federal government gives out subsidized loans to a significant number of students who demonstrate financial need. Because these loans are subsidized, the government pays the interest that accrues during enrollment plus a 6-month grace period. The available amount increases each academic year.

2. Direct Unsubsidized Loans: These loans are basically the same as subsidized loans except that all the interest that accrues during enrollment is charged to the student.

3. Direct Consolidation Loans: Consolidation loans combine federal student loans (besides PLUS loans) into one loan with one monthly payment.

4. Direct PLUS Loans: The federal government offers parents of students this PLUS loan (AKA Parent Plus loan) which typically comes with less favorable repayment terms and interest rates than student loans. However, a PLUS loan’s only limit is the cost of college tuition minus other financial aid, unlike other loans that cap at about $3,000-$6,000 each year.

5. Private loans: You can get a private student loan, but it will probably garner a higher interest rate and less favorable repayment options than a federal student loan. Refinance loans are private loans.

6. School scholarships: Your school may offer you scholarships if you meet certain criteria, and you don’t have to pay them back. Scholarships are usually awarded for merit, athletic talent, or other characteristics and achievements, such as a high GPA.

7. Outside scholarships: Organizations and nonprofits besides your school may award you scholarships, which you don’t have to pay back. These scholarships may be based on region, characteristics, achievements, or simply a killer application.

If you got a letter saying you need to pay federal grant money back, you might need help from a student loan attorney. Schedule a call with yours truly to see how I can help.