Dropping Out Means Paying Back Financial Aid

According to Educationdata.org, the dropout rate for undergraduate college students is 40%, with 30% qualifying as college freshmen who drop out before their sophomore year. Both are pretty significant figures. Students have a variety of reasons for dropping out of college. Some leave college to work, while others believe that they cannot continue because of a lack of financial support. Whatever the case, dropping out of college is not simple – and it’s not cheap. Why? Because students that drop out of college are required to pay back any financial aid they have used to pay for their college education.

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Impact to Financial Aid

Students can qualify for financial aid to pay for college by filling out the Free Application for Federal Student Aid – otherwise known as the FAFSA. Through this application, the federal government determines what a family can pay for college (Expected Family Contribution, or EFC) in order to determine whether it’s necessary for the student to utilize financial aid dollars as well.

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Once the student has applied to colleges, each institution will use the information gathered on the FAFSA to deliver a financial aid package. These packages can contain grants, scholarships, work study, and student loans. Though colleges and the government will use terms like “awarded” financial aid dollars, the money is actually earned. Therefore, when a student drops out of college, they have to pay back a certain amount of their financial aid, which is determined by a refund-calculation formula. Depending on when the student drops out of college, he or she must pay back 50% of a percentage of aid not used for classes. Sound confusing? Let us break it down with a little story problem. John receives a $2,000 Pell Grant for the semester and uses $1,000 for tuition. He drops out a fourth of the way through the semester. Under the rule, John has only "earned" 25% 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% of his unearned aid that didn't go toward tuition. Because he dropped out a fourth of the way through the semester, John earned $250 of his $1,000. Fifty percent of the remaining amount ($750) is $375, which is what John owes.

Impact to Student Loans

Just like financial aid, student loans must be paid back if a student drops out of college. Students will have a six-month grace period after dropping out during which no loan payments must be made; however, interest will accrue during this period and payments will begin promptly at the six-month mark. Unlike financial aid, there are payment plans that students can take advantage of in order to pay for their student loans. Income-based repayment plans will take a certain percentage of income each month, and the balance of the loans will be forgiven after 20-25 years. If a student is dropping out of college because they have a severe illness, like cancer, they can request a deferment or forbearance on their student loans. A deferment or forbearance allows students to pause their student loan payments for up to three years, giving them time to get themselves out of a really challenging period before having to make student loan payments. Interest will still accrue during this period, however.

Talk through Financial Implications of Dropping Out

Before students drop out of college, it’s pivotal that they understand the financial implications of their decisions. Typically, a financial aid officer can walk students through how much they will have to repay if they choose to leave the school. The financial aid officer will also help them walk through student loan payment plans. Additionally, the federal government provides an Exit Counseling session online at studentaid.gov. This course discusses important information as it relates to student loan repayment. If a student has loans through a private lender, they should call the lender to discuss their options when dropping out. It’s important to know how much money will have to be paid back and when payments will be billed. It’s worth noting, too, that with student loans, an individual could be paying these back for years with no college degree to show for it. So, students must heavily weigh this decision; it will impact them for years to come.