The Differences Between Loans, Grants and Scholarships

We all know that college is expensive. Luckily, there are several options out there to alleviate the immense burden of paying for college. The three most common forms of financial aid are scholarships, grants, and loans. Scholarship and grants are both free money that does not need to be paid pack, and people often use the term interchangeably, despite important differences. Moreover, not all loans are created equal, and not knowing the difference can cost you thousands of dollars in the long run. So, if you are confused by the differences between scholarships, grants and loans, here’s what you need to know about paying for college.


While grants are awarded based on financial need, scholarships are awarded based on merit, such as academic, athletic or artistic talent. Some scholarships may involve a need-based component, but the majority selection criteria are merit-based. There is great variety of sources by which scholarships are awarded, and they include colleges and universities, individual university departments, nonprofit foundations, corporate organizations and several other third parties. Like a grant, scholarships will not need to be repaid.


Grants provide money for college that does not need to be repaid. Typically, grants come from the state or federal government, from the college itself, or from private sources. The Federal Pell Grant is generally awarded to undergraduate students with exceptional financial need. Your financial need, from the federal or state government perspective, is based off the information you provided on your FAFSA. Your eligibility will also be based on cost of attendance, enrollment status, and academic plans. You can use the award money for tuition, books, rent, and other necessary living expenses while you are attending college.


If scholarships and grants don’t cover the entire cost of your tuition, you may have to take out a student loan to make up the difference. Loans are a sum of money given to a student with the intention of it being repaid with interest. There are three main types of loans: Federal subsidized loans, federal unsubsidized loans, and private loans.

A subsidized loan is provided by the government and is offered to undergraduate students based on financial need. There are several advantages to subsidized loans, First, the interest is typically very low. Also, the Department of Education will pay the interest on the loans while you are attending school at least part time, for six months after leaving school, or during a period of deferment having your loan payments postponed).

An unsubsidized loan, on the other hand, requires the student to pay the interest that will accrue even while you were in school. An unsubsidized loan is not based on financial need and is available to undergraduate and graduate students.

Private loans come from banks and credit unions. Some banks have special loans just for students while others offer general personal loans. The downside of private loans is that banks are stricter about who gets money.

Which is Right for Me?

Paying for college is never easy. Discuss the financial aid options with a school counselor and your parents. It is always a good idea to seek out grants and scholarship first instead of a loan. Regardless of how you end up paying for college, you are making a solid investment to further your education.

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