How should interest earned on federal funds be handled?

• A. It must be deposited in a separate interest-bearing account for administrative costs.
• B. It is always returned to the federal government.
• C. It is often restricted per agency policy and may be used for program purposes or turned over to the sponsor if required.
• D. It is automatically spent on future activities.

Answer: (C)

Interest earned on federal funds is governed by agency policy and the terms of the grant. The money doesn’t automatically go to a separate admin-cost account, nor is it always returned to the federal government or automatically spent on future activities. In practice, the handling of this interest is restricted by the awarding agency’s rules and may be used to support program activities or remitted to the sponsor if the grant terms require it. This is why the best answer describes it as often restricted per agency policy and potentially usable for program purposes or turned over to the sponsor as required.