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If a school put loans in my financial aid package, do I have to accept them?

December 09, 2018

If a school offers you student loans as part of a financial aid package, you may be wondering if you are required to accept them, or if you should.  The good news is that you are never required to accept financial assistance - although you certainly can. For every school that offers financial aid, it is important to look critically at the money being offered to decide which part(s) of the package that you want to accept.

Financial Aid Acceptance Sequence

Some forms of financial aid are better than others.  Free money, in the form of scholarships or grants, is the best, followed by earned money (in the form of a work-study position), followed by borrowed money.  Federal loans are preferable to loans sponsored by a college or state government, which in turn are preferable to private loans issued by for-profit financial institutions.  Below is the sequence by which financial aid should ideally be accepted, along with key factors to consider for each form of assistance.

  1. Scholarships and grants: While scholarships and grants generally qualify as “free” money, some programs come with additional qualifying conditions.  Certain scholarship programs, for example, require you to maintain a minimum grade-point average. A TEACH Grant could convert into a loan if you do not work as a teacher for the required number of years after graduation.  Make sure that you understand exactly what is required of you before accepting any grant money or scholarships.

  2. Work-study income: Work-study positions allow you to earn income that you can apply toward your school expenses.  While this money is yours to keep, free and clear, you do have to pay taxes on it.  You will also need to adeptly manage your time, in order to not neglect your studies.

  3. Federal student loans: Any federal loan money that you borrow must be paid back, with interest.  Subsidized federal loans are preferable to unsubsidized loans because unsubsidized loans accrue interest from the date that the loan is disbursed.  The accrued interest on unsubsidized loans is eventually capitalized, which means that it is added to the principal amount that you actually borrowed when you start paying the loans back.  If you do need to borrow money to finance your education, however, federal loans are generally the best because they offer the lowest fees and interest rates.

  4. College or state government-issued student loans: If you are not eligible for federal student aid, you may still be able to borrow money from your state government or college directly.  Of course, you will still be required to pay interest on the debt. For any loan offer that you receive, make sure to read the terms and conditions very carefully.  You’ll want to clearly understand the repayment requirements before signing on the dotted line.

  5. Private student loans: After you have exhausted all other alternatives, you still have the option of borrowing student loan money from a private lender.  For-profit institutions typically charge higher interest rates and may have less flexible repayment options, so borrowing from quasi-public lenders (such as Sallie Mae) or credit unions may be preferable to accepting money from a Wall Street bank.  As with any debt obligation, make sure that you clearly understand the repayment terms and conditions before accepting any money.

Higher education is not free, and in fact can be very expensive.  You have many options available to you for how to pay for it, and many lenders who would be more than happy to profit at your expense.  Regardless of where you go to school, or how you decide to pay for it, make sure to clearly establish a budget of expected costs at the very beginning.  Know how much money you need, and do not borrow more than is strictly necessary. Aggressively pursue all grants, scholarships, and work-study positions available to you.  Remember that every dollar you borrow must be paid back - with interest! Study hard, and make the most of it.