How Is a Student Loan Different from a Scholarship?

There are two main options to fund the college cost: student loans and scholarships.
The difference between scholarships and loans is that students do not pay back scholarships – the money is free. However, students must repay student loans with interest.

The federal government is the source of most student loans; meanwhile, many organizations provide college students with scholarships.

What Is a Student Loan?

Simply stated, a student loan is a loan taken out to cover the costs of a college education. You can get a student loan from the federal government, Discover, some banks, and many other institutions. In fact, your university might offer you a student loan.

Before you sign on the dotted line of a loan agreement, there are several things you should consider. Every student loan program is different from another. For this reason, you should thoroughly research your options.

There are two types of student loans, subsidized and unsubsidized. Subsidized student loans are the ideal loan choice. The lending institution will offer you a subsidized loan amount based on your financial need.

The most important part of this loan type is the repayment program. Subsidized loans do not start earning interest until you graduate. Additionally, you will not be required to make payments until six months after you finish school.

The second type of loan, an unsubsidized student loan, is less forgiving. Lending institutions determine the loan amount based on the cost of attendance. Generally, this results in a larger loan amount.

Unfortunately, an unsubsidized loan requires monthly payments and begins earning interest immediately. While you can defer making payments until six months after graduation, the loan will continue accruing interest.

Always choose a subsidized loan before an unsubsidized one if given the choice.

Related Article: Here’s What Happens If You Stop Paying Student Loan

As mentioned earlier, the federal government lends most student loans in the United States. Applying for a federal loan is easy too.

Complete the Free Application for Federal Student Aid (FAFSA) every year to receive federal loan offers. The best part of the FAFSA program is that it applies to more than just loans. With just one application, you apply for student loans, scholarships, and grants (we will explain the last two in the sections below). Your university will inform you of the financial aid you qualify for.

The government is not the only one to offer student loans. Other institutions offering student loans include College Avenue, Discover, and Sallie Mae. You should also compare loans from your financial institution or credit union.

When looking at different loans, compare the interest rates and repayment plans. Do not agree to a loan that will be too difficult to repay. Additionally, you should avoid borrowing more than absolutely necessary.

Before accepting any loan, claim any scholarships and grants you qualify for.

Related Article: Fellowship vs Internship

What Is a Scholarship?

Scholarships and grants are essentially the same things. They differ from student loans in that you do not pay them back, except under specific circumstances. We will discuss the exceptions to this rule later, but in general, you will not have to repay any scholarships you receive.

Another difference between student loans and scholarships is the application process. While student loans are awarded based on credit score and cost of attendance, scholarships are awarded with financial need and merit in mind.

As briefly mentioned earlier, there are hundreds if not thousands of organizations that offer scholarships to prospective or currently enrolled college students. Additionally, your FAFSA will apply to federal grants, also called Pell Grants.

The amount of money you receive from a Pell Grant depends on your financial need. Like your student loans, your school will notify you of any Pell Grants awarded to you.

As you prepare for college, people will repeatedly tell you to apply for as many scholarships as possible. Listen to them. The more scholarships you receive, the less money you have to pay out of pocket or with students loans to go to school.

Even better, applying for scholarships is free!

Not sure where to find scholarships?

Websites such as Scholly, Scholarships, College Board, and Niche provide students with lists of scholarships they might qualify for.

Unfortunately, the popularity of these websites means that thousands of college students will apply. The more students who apply for a scholarship, the smaller your chances of receiving it are.

As you research scholarships, you will see that the applications are all unique. Some scholarships will require you to submit an essay. The topic of this essay will vary depending on the organization offering it. An example of an essay topic might be the importance of not texting and driving. Be prepared to write on a variety of subjects.

Other scholarship applications will include projects. Once again, the nature of the project will vary by organization.

For example, a scholarship offered by an art gallery might require applicants to submit a piece of their work. A scholarship for musically inclined students might request a performance video. Less artistic scholarships, like a STEM scholarship, often ask students to submit research projects or inventions. The possibilities are endless.

Although some scholarships require you to submit something along with your application, many scholarships are random drawings. This means the scholarship winner is selected purely by chance, not by merit. While these are the easiest scholarships to apply for, they are the hardest to “win.”

You should also apply to any scholarships offered by the university you attend. Since these scholarships are offered to a smaller group of people, there is a better chance that you will receive one. These scholarships will likely be based on academic merit and sports involvement.

When applying for scholarships, pay careful attention to their deadlines. To qualify for a scholarship, you must submit your application on time. If you miss a deadline, you will not be awarded the scholarship. This rule applies to government and university specific scholarships as well. There are rarely second chances to apply for these!

Reasons to Pay a Scholarship Back

As mentioned earlier, scholarships do not need to be paid back except under specific circumstances. In general, you will not have to repay a scholarship awarded to you by a third-party organization. However, in certain circumstances, you do have to repay Pell Grants and other school scholarships.

Scholarship and grant amounts awarded by the government or by your university are determined by a number of factors, including the number of credits you are enrolled in. If you register for less than the required number of credits before the semester, the school will prorate the scholarship. In other words, they will give you a lesser amount.

Unfortunately, if you drop a class after the refund deadline and drop below the minimum required credit threshold, you will need to repay the scholarship.

Another reason you might have to repay a scholarship is dropping a specific course. If the terms of the scholarship indicate that you must be enrolled in this specific course and you drop it later, you must return the funds.

These terms may also apply to changing majors. If the scholarship you received was reserved for students in your previous major, you may have to repay the scholarship.

Because federal grants are awarded based on financial need, if your needs change, you may have to repay the grant money. For example, if you receive a full-ride scholarship from an essay contest, you no longer need government assistance.

Because schools award scholarships generally by academic achievements, a drop in your academic status could disqualify you from keeping the scholarship.

If you fail a class, the school may require you to pay back the scholarship money spent on it. Additionally, if your grade point average drops below a certain level, you will no longer qualify for the scholarship. However, this will rarely lead to repaying a scholarship, as grade point averages are calculated at the end of the semester.

In the event you need to repay a scholarship, your school will notify you. For federal grants, you have 45 days after notification to pay back the amount or enter a repayment agreement with the school. The school may decide to send the debt to collections.

Learn more about repaying scholarships from Student Aid.

After completing a class, you no longer need to worry about paying back a scholarship. Neither the school nor the government will ask you to repay past grants for current circumstances.

Dealing with the Financial Aid Office

Speaking with someone from the Financial Aid Office at your university might seem intimidating—at times it can even be frustrating. However, if you prepare yourself beforehand, you can drastically improve your experience.

First, what services does the Financial Aid Office offer? Your university’s Financial Aid assists students with their applications to scholarships, grants, student loans, and any other type of financial aid.

When a problem arises with a student’s financial aid, the office will help sort out the problems. Essentially, anything having to do with paying for school will go through the Financial Aid Office.

If you are worried about paying for college, meet with a Financial Aid Advisor to discuss the options available to you.

Before going to the Financial Aid Office, prepare yourself.

There is nothing worse than showing up and not having the answers or materials needed to correct the problem at hand. Look over the financial aid information available on the university website. While this will only show you minimal information, knowing the answers to simple questions prepares you to ask more complicated ones.

As you research the provided financial aid information, write down a list of questions. If you find the answer, write it down. Otherwise, you have a list of prepared questions to take to your appointment with a Financial Aid Advisor.

Start by discussing the true cost of attendance. This cost includes the price of books, rent, learning materials, tuition, and other living expenses. Knowing this number will help you devise a strategic plan to pay them off.

They can then inform you about possible scholarships and their deadlines. Additionally, Financial Aid Advisors can help you choose the right student loan package.

Most colleges offer a work-study program.”

This program allows students to work part-time on-campus while taking classes. Some universities might even offer tuition discounts to students who work on-campus. Many work-study programs allow the student to gain experience in the area of their field of study, but not all programs do.

Work-study programs are only available to students with financial need; however, the student does not have to be enrolled in school full-time to qualify.

When filling out your school’s scholarship application, they will likely ask if your are willing to participate in a work-study program. If not, speak to your Financial Aid Advisor about enrolling in the program.

Not all work-study programs employ students on-campus. At some universities, off-campus employment opportunities are available.

According to Student Aid, these jobs are hosted by nonprofit organization or public agency. This type of work encourages students to get involved in the public sector.

Occasionally, work-study programs will exist in the private sector; however, these are rare and often have restrictions governing them.

In general, work-study programs pay by the hour at the federal minimum wage. You can only work a certain number of hours, determined by your Federal Work Study award. While you won’t be able to save extra money, you will be making enough to pay for your education.

Work-study is an excellent option because your employer will take into account your class schedule. Additionally, it provides you with the chance to gain valuable work experience while you earn your degree.

When deciding how you will pay for college, consider all other options before resorting to student loans. Although not always the case, it is possible to graduate from college debt free. Working towards this goal (or a goal of minimal debt) will benefit you immensely.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily represent those of the College Reality Check.

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