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What’s the Difference Between Grants, Scholarships, and Loans?

Lifestyle
Published: 3 years ago, Last Updated: 5 months ago
Dori Zinn
Writer: Dori Zinn
Jackson Rhodes
Reviewer: Jackson Rhodes
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Getting ready for university is more than preparing academically; it’s about understanding the financial landscape, too. If you aren’t paying attention, you could find yourself going through a confusing application process, inadvertently racking up fees, and end up taking out massive student loans, falling into major debt long before you start your career. That’s why you need to know the fundamental differences, such as how a student loan is different from a scholarship.

Before you head off to school, make sure you comprehend the distinctions between grants, scholarships, loans, and their respective application processes, including the payment terms and associated fees.

Get Money Through Grants and Scholarships

Scholarships and grants have one common point: both are types of free money that you don’t have to pay back. The more money, the less your final academic bills will be, lessening the need for payment after you graduate. With due diligence, you could fund your entire university education through grants and scholarships.

Grants

Grants are awards for free money based on need, offered by various sponsors. You can win grant money for just about anything, including:

  • Socioeconomic background
  • Race
  • Ethnicity
  • Sexual orientation
  • Where you go to school
  • Potential major
  • Your family
  • Disability or disabilities

Grants can originate from many different groups, including:

  • The government. You can get grants at the local, state, and federal levels. The Federal Pell Grant and TEACH Grants are awarded at the federal level.
  • Nonprofits or private organizations. Many businesses have nonprofit arms to handle philanthropy and giving. For instance, Google for Nonprofits and The Coca-Cola Foundation work on behalf of their private counterparts.
  • Institution. Many colleges and universities award grants based on need. Amounts vary based on award, college, and financial circumstances.

Typically, grants come with no stipulation for repayment. However, some carry conditions that, if not fulfilled, might require you to repay the grant. For instance, the TEACH Grant requires teachers to meet specific qualifications by a certain time, or their grant converts into an unsubsidized loan. When you apply for the TEACH Grant, you’ll sign an agreement where you understand the terms, and if you fail to meet them, you’ll repay the loan.

Before you start the application process for a grant, ensure you fully understand all the requirements, including the consequences of not meeting them all.

Scholarships

Scholarships, another form of monetary support, are merit-based awards that do not need to be repaid and are usually based on factors like grade-point average (GPA), test scores, or extracurricular activities, such as sports or clubs.

Young happy woman with papers in her hands.

Scholarships can cover education-related expenses, and depending on the award, you can pocket any extra to cover other needs, like transportation, housing, and food. Scholarships are sponsored by:

  • Nonprofits and community groups
  • Religious groups
  • Private companies
  • Social organizations
  • Colleges and institutions
  • Employers
  • Government entities at the federal, state, and local levels

When reviewing scholarships, ensure you meet all the eligibility criteria before commencing the application process.

How to Find Scholarships and Grants

The degree of financial support varies among grants and scholarships. When you’re exploring these opportunities to help pay your fees for university, maintain a list or spreadsheet encapsulating all the details of:

  • The name of the award
  • Award amount
  • Specific eligibility requirements
  • If it’s an ongoing award (for instance, can you get it every year you’re in school?)
  • The due date for the application and any supporting documents
  • If you’ve applied, won, or didn’t win the award

Many awards will request a copy of the Free Application for Federal Student Aid, or FAFSA, as part of the application process. Therefore, ensure your paperwork is updated before you apply.

Being organized will help you manage your potential awards effectively. It simultaneously prevents you from applying for the same award more than once and guarantees you secure enough money to cover the total cost of university.

You can explore scholarships and grants, some of which may be sponsored by:

  • Local businesses and organizations
  • Churches, synagogues, mosques, and other religious groups
  • Your potential school’s financial aid department
  • Your high school guidance counselor

Bear in mind that some awards are designated for specific people or purposes, including:

  • Military affiliation
  • Level of schooling (undergraduate, graduate, master, doctorate)
  • Academic achievement
  • Financial need

When searching for awards, try to hone in on ones that match your personal needs and aspirations. For instance, some databases enable you to search for awards by race, sexual orientation, and disability.

Test a few different search strategies to ensure you’re casting a wide net. The more grants and scholarships you accumulate, the less you may need to rely on other forms of money to pay for university, like student loans.

Cover Funding Gaps with Student Loans

If you don’t have enough money to cover your tuition through grants, scholarships, and family contributions, you can apply for student loans. This would entail another application process, but it’s another way to ensure that you can handle the fees associated with your university education.

Calculating repayment options for federal and private student loans.

A student loan, which may often be considered a necessary supplement to a college education, is different from a scholarship. They require you to pay them back. There are two types of student loans: federal and private.

Federal Student Loans

You may qualify for these loans when you complete the FAFSA every year. Federal loans are generously offered by the federal government and administered through the U.S. Department of Education.

Some loans are carefully based on need, while others allow you to borrow as much as you want based on the cost of attendance and other expenses. Here’s a breakdown:

  • Direct Subsidized Loans: Undergraduate students who show financial need can receive these loans after completing the FAFSA.
  • Direct Unsubsidized Loans: These are for undergraduate, graduate, and professional students. These loans aren’t based on need.
  • Direct PLUS Loans. Parents of undergraduate students or students in graduate or professional programs can apply for a Direct PLUS loan. A credit check is required, so you might not qualify if you have an adverse credit history.
  • Direct Consolidation Loans. After you graduate, you can combine all eligible federal student loans into one through a Direct Consolidation Loan.

There’s a limit to how much individuals can borrow in subsidized and unsubsidized loans. If you need to borrow student loans to pay for school, your first stop should ideally be federal student loans.

For most students, federal student loans will adequately cover all their educational needs. But if you still need to cover the funding gaps in your education, you’ll be required to explore private student loans.

Private Student Loans

These loans are offered by various companies such as banks, credit unions, or online lenders. There’s no set standard for private loans, so eligibility, terms, and loan approval criteria all vary by lender.

Private student loans involve credit checks, so if you have low credit or no credit, you might need to get the help of a cosigner. Keep in mind that a cosigner is responsible for your loan, too. So, if you fail to repay your loan, your credit score will plummet — and so will your cosigner’s.

Private Student Loans vs. Federal Loans

Private student loans are helpful when you’re in need, but they should be your final option when exploring funding for school. Federal student loans tend to have the lowest interest rates and offer many different long-term repayment options for affordable monthly payments. They also offer income-driven repayment plans and forgiveness options that private student loans don’t provide.

"Federal student loan" written on a paper.

Unlike federal loans, private student loans don’t offer as much protection in case of an emergency. For instance, if you get laid off from your company and can’t afford to pay your student loans, federal student loans offer deferment and forbearance options, which temporarily pause your payments without hurting your credit score. While private ones have hardship assistance, not all private student loans offer these generous terms.

How to Choose between Grants, Scholarships, and Loans

If you’re not sure where to look first to fund your education, here’s how to see which options are best for you:

1. Start with free money. Whether it’s grants or scholarships, exhaust all your free money options before moving on to other funding methods. 

2. Borrow through federal student loans. If you need to take out one, start with federal. They offer the lowest interest rates and don’t use credit history for most loan options to determine eligibility. Use all your federal student loan funding before looking into other options.

3. Finish with private student loans. If you still need more money to cover education costs, apply for private student loans. Try to limit these to as little as possible, if at all. Remember, the more you borrow now from the company, the more you’ll pay back after you graduate – with interest.

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