How Financial Aid Refund Checks Work

First and foremost, financial aid is intended to cover educational expenses. In the case of federal financial aid (think Stafford Loans and Pell Grants), the funds can only go toward "institutional expenses," which are limited to tuition and fees and student housing [source: Oregon State University]. But once financial aid has covered those bills, students may receive a check for whatever awarded money is left over.

Consider, for instance, an in-state undergraduate student at the University of Tennessee who plans to attend during the Fall 2009 semester. If the student elects to take a full course load of 12 hours, the tuition and fees will come to $3,425 [source: University of Tennessee]. Let's say that the student also plans to live on campus and enroll in a meal plan, which hypothetically tacks on an additional $2,000 for the semester. If that student earns more than $5,425 in financial aid, he or she should be entitled to a refund check.

Indeed, students at the University of Tennessee who were eligible for a financial aid refund received more than $2,000 on average during the 2007 -- 2008 school year [source: Garrett]. Across the University of Tennessee system, annual financial aid refunds amounted to more than $60.5 million. Students likely applied that extra income to related expenditures, such as books and supplies, boarding and transportation.

Since colleges don't cut financial aid refund checks until after all expenses are paid, they're generally dispersed a few days after the beginning of each semester [source: Indiana University]. And not all unused aid returns to the student. Refunds for the Parent Loan for Undergraduate Students (PLUS) may be sent to the parent borrower or to the student, depending on the institution's regulations.

Paper financial aid refund checks will be mailed to the student's current address on file with the college or university. In that case, students should ensure their mailing address is up to date to guarantee that they receive the refund. If a refund check is lost, most schools require a mandatory waiting period before issuing a new one, often around two or three weeks. Some schools also offer a direct deposit option for financial aid refunds; students who are interested in direct deposit may need to contact their financial services or bursar's office to enroll.

Once refunds are dispersed, the burden falls to the students to stay in school. Otherwise, students who aren't able to complete their coursework might end up having to return some of that bountiful refund.

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.