How Is a Student Loan Different from a Scholarship?

Degree-seeking students apply for financial aid to reduce the overall cost of college.

According to the most recent data from the National Center for Education Statistics (NCES), up to 87% of first-time, full-time undergraduate students receive financial aid.

Financial aid comes in different forms:

  • Grants
  • Scholarships
  • Work-study jobs
  • Student loans

Scholarships are undeniably the most common form of financial aid, while student loans are the most common form of increasing debt among individuals aged 18 to 24.

They are extremely popular. That’s why we’ll focus on these two in this article.

So, how is a student loan different from a scholarship?

The main difference between scholarships and loans is that scholarships are essentially free money, but loans must be paid back in monthly installments with interest once borrowers graduate or leave college.

student loans
Student Loans

A Closer Look at Student Loans and Scholarships

Both a student loan and a scholarship can help you pay for college.

That’s the key similarity between them: making a college degree accessible.

You can apply for a student loan and scholarship at the same time — it’s not uncommon for many college students to borrow money if their scholarship awards are not enough to bring down the cost of college substantially.

However, it’s a must to know the features and pros and cons of each financial aid type before following suit.

What is a Student Loan?

In the simplest sense, a student loan is a loan you take out to pay for college.

Because it’s borrowed money, you have to pay it back some other time — after earning your college degree or the minute you quit going to college — together with interest.

There are two primary sources of student loans:

  • Federal
  • Private

While everything looks simple as far as the main sources of student loans are concerned, things can get complicated once you start to take a look at the various student loan types.

The following are the types of student loans from the federal government:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Parent PLUS Loans
  • Graduate PLUS Loans
  • Direct Consolidation Loans

Direct subsidized loans (also called subsidized Stafford loans) are available for undergraduate students who demonstrate financial need, which information provided on the FAFSA form determines.

Like other student loans, direct subsidized loans have to be paid back with interest.

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

However, the US Department of Education takes care of the interest on these loans in the following events:

  • While the borrower is enrolled in college at least part-time
  • During the first six months after leaving college
  • During periods of deferment (periods of postponement of loan payments)

On the other hand, there are only two types of private student loans:

  • Private student loans
  • Private parent loans

You can take out a private student loan from various sources, such as:

  • Banks
  • Colleges and universities
  • Credit unions
  • State agencies
  • Other lending institutions

What is a Scholarship?

As mentioned, scholarships are the most common form of financial aid.

They’re also the most sought-after since recipients do not have to repay them after completing or quitting their college education — scholarships are free gifts in the form of money that saves students from accumulating debt.

Scholarships are merit-based, which means that they are awarded to students based on:

  • Academic achievements
  • Artistic skills
  • Athletic abilities
  • Extracurricular activities
  • Fields of study
  • Special interests

So, in other words, you can also refer to scholarships as merit-based aid.

However, it is important to note that some scholarships may also have a financial need element to their eligibility requirements, which makes them ideal for talented students from low-income backgrounds.

And this brings us to this important question:

Scholarships vs. Grants: What are the Differences?

Both scholarships and grants are free money, which means students who receive them do not have to worry about repaying them after completing their degree programs or quitting college.

However, generally speaking, scholarships are merit-based, while grants are need-based.

Being mostly merit-based, scholarships are also available for wealthy college students, although they must maintain eligibility, such as by having a certain GPA or staying in their declared field of study.

On the other hand, grants are mainly for poor students.

Scholarships can come from different sources:

  • Federal government
  • State governments
  • Colleges and universities
  • Non-profit organizations
  • Private companies

Again, scholarships do not have to be paid back — being an awardee won’t leave you with debt you have to pay back monthly plus interest after earning your college degree.

Loans are different from scholarships and grants since they do result in educational debt.

However, you may have to repay your free scholarship money if you drop out of college.

And it’s not unlikely for it to become void if you switch majors or institutions.

Student Loan vs. Scholarship: Which is Better?

Whether a student loan or scholarship is better is on a case-to-case basis.

Mainly, it depends on the cost of attendance.

Unless you get a full-ride scholarship, which less than 1% of college students receive, it’s unlikely that your scholarship money can take care of the entire cost of your undergraduate education.

It’s when applying for a student loan can come to the rescue.

For many, a federal student loan on top of scholarships isn’t enough to cover the full cost of college, which is why some also turn to private student loans to bridge the gap between tuition costs and available federal financial aid.

What’s so great about a student loan is that you can use it to deal with many educational costs, such as:

  • Tuition
  • Books and supplies
  • Computer and software tools
  • Off-campus housing
  • Sheets and towels
  • Transportation
  • Study-abroad costs

On the other hand, most scholarship awards have limited use.

However, before you start filling out forms, consider the fact that student loans aren’t free money.

You must start repaying most federal student loans six months after you leave college, either because of completing your degree program or opting out) or dropping below half-time enrollment.

In some instances, repayment terms for private student loans are different.

Some private loans allow you to delay your first repayment for a period of time (private lenders refer to it as a grace period), which makes them similar to the repayment terms of most federal loans.

However, other private loans require repayments while you are still in college.

You don’t have to worry about confusing repayment terms and agreements when it comes to scholarships since a student loan must be paid back, but a scholarship is not paid back.

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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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