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Dropping Out Means Paying Back Financial Aid

By Michael Pugh

January 04, 2013

As if there weren’t enough reasons not to drop out of school, the Department of Education has provided yet another. Students who drop out of college are required to pay back a portion of their federal-aid funds such as the Pell Grant.

Even though many educators and college officials feel that students may be reluctant to accept financial aid and attend college if they fear having to owe money, the government feels that students should have to “earn” their financial aid.

What percentage of his or her aid a student has “earned,” and what percentage they may potentially owe, is based on a refund-calculation formula.

And You Thought Trigonometry Was Difficult

The Department of Education’s formula for figuring out how much a dropout owes is as follows: students must pay back 50 percent of a percentage (based on when during the semester the student drops out) of aid not used for classes.

A hypothetical case:

“John” receives a $2000 Pell Grant for the semester and uses $1000 for tuition. John drops out one-fourth of the way through the semester. Under the new rule, John has only “earned” 25 percent of his grant. The college is required to return all of John’s “unearned” aid that went toward tuition (75 percent, or $750). John is personally required to pay back 50 percent of his unearned aid that didn’t go toward tuition. Because he dropped out one-fourth of the way through the semester, John earned $250 of his $1000. Fifty percent of the remaining amount ($750) is $375, which is what John owes.

Complicated? You Bet.

If you’re concerned about whether you may owe money in the future, the Department of Education has provided universities with software and worksheets to help calculate how much money students may owe. Why Is This Rule in Effect?

In an introduction to the new regulations, the Department of Education explains:

“Aid is awarded to a student under the assumption that the student will attend an institution for the entire period for which the assistance is awarded. When a student ceases academic attendance prior to the end of that period, the student may no longer be eligible for the full amount of funds that the student was originally scheduled to receive.” Why the Opposition?

Those in opposition to the rule feel that it will primarily affect low-income students, the group most dependent on federal aid. Many financial aid administrators feel that the government shouldn’t penalize poor students for dropping out of college, and nor should lower-income students have to “punch a clock” in order to receive their grant money.

Another fear is that if a student has difficulty repaying their aid money, they’ll be left with tarnished credit and a near-impossible chance of ever re-entering college.

For better or for worse, the rule will remain in effect for the forseeable future. Now more than ever, the best advice to a discouraged student may be, “stay in school.” It might just help them avoid student debt.


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