The Federal overaward regulations in 34 CFR 673.5(b) requires colleges to take into account any resources they know about or can anticipate when awarding or disbursing aid. In addition, 34 CFR 673.5(d) requires colleges to reduce the size of the need-based aid package whenever the student receives resources that exceed financial need by more than $300.
Resources are defined by 34 CFR 673.5(c) as including Federal Pell Grants, William D. Ford Federal Direct Loans, Federal Family Education Loans, Federal Perkins Loans, education grants (including FSEOG, state grants, and ROTC subsistence allowances), scholarships (including athletic scholarships and ROTC scholarships), tuition waivers, fellowships, assistantships, Veterans educational benefits paid under Chapters 30, 31, 32, and 35 of title 38 of the United States Code, AmeriCorps awards, net earnings from need-based employment, and insurance programs for the student's education. The regulations also include in 34 CFR 673.5(b)(1)(xiii) "any educational benefits paid because of enrollment in a postsecondary education institution or to cover postsecondary education expenses".
These definitions parallel the definitions of "estimated financial assistance" in sections 480(j) and 428(a)(2)(C) of the Higher Education Act. Section 471 of the Higher Education Act defines financial need as cost of attendance minus EFC minus estimated financial assistance. (Most federal student aid programs, including Federal Perkins, FSEOG, and FWS, are capped at financial need.) Section 428H(d) requires colleges to withhold the amount of subsequent loan disbursements corresponding to the overaward. Section 443(b)(4) defines the overaward tolerance of $300.
The following is an excerpt from section 480(j)(1) of the Higher Education Act:
For purposes of determining a student's eligibility for funds under this title, estimated financial assistance not received under this title shall include all scholarships, grants, loans, or other assistance known to the institution at the time the determination of the student's need is made, including veterans' education benefits as defined in subsection (c), and national service educational awards or post-service benefits under title I of the National and Community Service Act of 1990 (42 U.S.C. 12571 et seq.).
The following is an excerpt from section 471 of the Higher Education Act:
SEC. 471. [20 U.S.C. 1087kk] AMOUNT OF NEED.
Since money is fungible, colleges have some flexibility in how they reduce aid. They can't cancel undisbursed Federal Pell Grants, but they can cancel the part of any other undisbursed loan or grant corresponding to the amount of the overaward. Most colleges will reduce their own aid before touching federal or state aid. Most colleges will try to make the reductions in a fashion that is favorable to the student, such as reducing loans before reducing grants.
If, after reducing all undisbursed loans and grants, the resources still exceed financial need by more than $300, the amount by which they exceed need by more than $300 is considered an overpayment. The student is required to either repay the overpayment in full or make arrangements to repay the overpayment that are satisfactory to the holder of the overpayment debt.
If the student fails to repay the overpayment, the school is required to refer the case to the US Department of Education. Failure to repay an overpayment may affect eligibility for further federal student aid, per 34 CFR 668.32(g)(4) and 34 CFR 668.35.
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