When students withdraw from classes or from college altogether, they don't get to take their financial aid refund money and run. Failure to complete courses may result in students actually owing financial aid money back to the institution since they didn't technically earn the award. The amount of refunded financial aid students must give back is generally based on the number of days they attended school, divided by the total number of days in the semester. To assess how much aid students technically earned, that proportion is then multiplied by the amount of aid doled out.
For example, if Student X receives $5,000 in refunded aid and attends 10 out of 40 possible semester days, he has earned 25 percent of $5,000, or $1,250. Any of the remaining $3,750 would be owed back to the funding source, such as the university or the federal government. Due to this financial obligation, schools urge students to contact their financial aid office prior to withdrawal to avoid accruing debt.
The rules differ slightly for returning refunded federal financial aid. Once students earn 60 percent of their aid (attend class for 60 percent of the semester, in other words) they won't owe back any refunded federal aid. This rule applies to Federal Subsidized and Unsubsidized Stafford Loans, Parent Loans to Undergraduate Students (PLUS) , Pell Grants, Academic Competitiveness Grants, Teacher Education Assistance for College and Higher Education Grants, and Federal Supplemental Educational Opportunity Grants [source: Tennessee State University].
If students don't earn 60 percent of their federal aid, they must repay any remaining refund for Stafford, Perkins and PLUS loans [source: U.S. Department of Education]. For federal grants, such as Pell Grants, students will only owe half of any unearned refund.
Financial aid refunds can provide much-needed monetary cushions to get students through college. But just like choosing a college, a major and practically every other component of higher education, it shouldn't be taken lightly. Loans must eventually be repaid, and unearned awards aren't treated as free cash.
For more information on planning and saving for college, check out the links on the next page.