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Why Do We Owe the College Money After the Student Dropped Out?

Mark Kantrowitz

January 09, 2012

My son was awarded an amount from FAFSA and also money from the LIFE and Pell grants. We paid the remainder of his tuition out of pocket. He started his freshman year and started having some medical issues. He withdrew from school during the second drop period. The university sent us a letter explaining how this money was sent back to the issuers. Now the school is telling us we owe them $1,700, how can this be? — C.D.

There are two separate policies that apply to withdrawals. One is the federal government’s policy concerning the return of federal student aid funds. The other is the college’s refund policy. When the college’s refund policy is not perfectly aligned with the federal regulations concerning the return of federal student aid, it can result in a debt to the college.

The federal regulations concerning the return of Title IV student aid (34 CFR 668.22), referred to as R2T4 by college financial aid administrators, are a bit complicated. The gist is that a student “earns” the financial aid during the semester. If the student drops out mid-semester, any “unearned” federal student aid must be returned to the federal government. The amount of financial aid that has been earned by the student is based on the withdrawal date. Up until 60% of the way through the semester, the financial aid is usually earned in proportion to the number of days into the semester. Once the student reaches the 60% mark, the student is considered to have earned all the federal student aid.

When the money is returned, there’s a preference order in which federal loans are returned before federal grants. The goal is to leave a student who drops out with as little federal student loan debt as possible. Students who drop out are three times as likely to default on their student loans as students who graduate.

Most colleges have refund policies that match the R2T4 regulations, but some do not. For example, some colleges charge the full semester’s tuition up front and do not do a proportional refund mid-semester. At such a college the return of financial aid to the federal government leaves the student owing a balance to the college. The balance is based on the difference between the amount owed under the college’s refund policy, the financial aid that wasn’t returned to the issuers and the amount paid by the family.

It is also possible that there amounts that were delayed in billing, such as overdue library books, parking fines and cafeteria charges.

Higher-cost colleges and for-profit colleges are less likely to align their refund policies with the R2T4 regulations. These colleges justify the less generous refund policies by arguing that a student who drops out leaves them with an unfilled seat and a loss of tuition revenue. The college can’t admit another student mid-semester to make up the difference.

Some colleges offer parents the option of buying tuition refund insurance in advance to cover the difference, but these insurance policies are expensive and often come with a variety of limitations, such as a preexisting condition exclusion of 6 months to a year.

A college’s refund policy should be available in its course catalog and/or on its web site.

Parents who are faced with a big bill due to a mismatch between the college’s refund policy and the R2T4 regulations should appeal to the college for a waiver of the refund policy. Colleges are more likely to grant the appeal when the withdrawal is due to circumstances beyond the student’s control or when the family does not have the resources to pay the bill.

If a student owes money to a college, the college can refuse to release official transcripts and diplomas. This can prevent the student from transferring to another college. The college can also refuse to readmit a student until the previous bills are paid.


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