Grants vs. Scholarships vs. Loans: What's the Difference?

Attending college is a major decision many high schoolers face as they get ready to graduate. Around 17.9 million students have enrolled annually in a graduate or undergraduate program. Figuring out how to pay for their education is one of the most challenging things for prospective college students. 

It's confusing to know the difference between grants vs. loans vs. scholarships. While they can all help you pay for your education, they each have key differences. The main differences are whether you need to repay the funding and how funds get awarded. 

This guide will discuss everything you need to know about loans, grants, and scholarships. Figure out the right options for you as you get ready to embark on your college career. 

What Is a Grant?

Grants are school funding that typically doesn't have to be repaid. They can be issued to college students from a few different places, such as:

• -Career school
• -College
• -State government
• -Federal government
• -Nonprofit or private organization 
•  

There are multiple types of grants. Grants are issued based on your financial needs. The main difference between a grant and other types of financial aid is that your performance or merit isn't taken into account. 

What Are the Types of Grants?

The Department of Education offers a few different types of grants. They're designed for students going to community colleges, four-year institutions, and career schools. 

Pell Grants

Pell Grants are awarded to undergraduate students who show extreme financial need. They also haven't earned a professional, graduate, or bachelor's degree. 

The maximum amount a student can receive for a Pell Grant is $6,895 per school year. The amount you receive depends on the following:

• -Your financial need
• -Status as a part-time or full-time student
• -Cost of attending school 
• -Plans to go to school for a full year
•  

This type of grant is the biggest grant program offered by the Department of Education. It was named after Senator Claiborne Pell of Rhode Island, the main sponsor of the program. It was founded in 1972. 

Pell Grants can be a major source of aid for students, but they're a small part of your financial picture. You will likely have to look for other sources of funding, like student loans. 

Supplemental Educational Opportunity Grants (FSEOG)

The school you're attending will administer the FSEOG program. Keep in mind that not all colleges and universities participate. You'll need to check with them to see if they offer it. 

As with other grants, you can apply for an FSEOG by filling out a FAFSA. This helps your college figure out how much financial help you need. They'll give FSEOGs to students that are in the most need. 

Most students that qualify for an FSEOG can receive between $100 and 4,000 each year. The amount you receive depends on:

• -The amount of other financial aid you're receiving 
• -When you apply
• -Your financial need
• -The amount of funding available to your school 
•  

Each school that participates in the program receives a specific amount of funding from the Department of Education. Once they've been awarded their entire allotment for the year, they don't receive any more funding. It works a little bit differently than a Pell Grant, which gives funding to every eligible student. 

That's why it's important to apply for financial aid as soon as you can. Each college sets internal deadlines for its campus-based funding. You can find their deadlines by contacting their financial aid office or by looking at their website. 

Iraq and Afghanistan Service Grants

Iraq and Afghanistan Service Grants provide funding to career schools and college students to help them pay for their expenses. This grant has special qualification criteria that other grants don't. 

You might qualify for this type of grant if you're not eligible for a Pell Grant because of your EFC but you meet the other requirements.

You also have to have had a guardian or parent who was a member of the US armed forces and died while serving the country in Afghanistan or Iraq after 9/11. You also need to be younger than 24 years old or a college student at the time of your guardian or parent's death. 

This grant issues the same amount of money as a Pell Grant. However, it can't exceed your attendance cost for that year. 

Teacher Education Assistance for College and Higher Education (TEACH) Grants

TEACH grants are different than other ones because you have to perform a teaching service obligation to receive the grant. If you don't complete the obligation, your grant will get converted into a loan. You'll have to repay the grant, including interest payments. 

To qualify for a TEACH grant, you need to meet the following criteria:

• -Basic criteria for federal financial aid programs
• -Be enrolled at a college or university that offers the TEACH grant
• -Complete the FAFSA form 
• -Be enrolled in a program that's eligible for a TEACH grant
• -Meet specific academic requirements 
• -Sign an agreement 
• -Receive grant counseling 
•  

Qualifying students can receive up to $4,000 in grants each year. 

Am I Eligible for a Grant?

Your eligibility is based on your demonstrated financial needs. That's the difference between your expected family contribution (EFC) and the college's cost of attendance (COA). The COA includes multiple things, such as:

• -Room and board
• -Tuition
• -Books
• -Other fees
• -Personal expenses 
•  

For example, if your family expects to contribute $15,000 and the COA of your chosen institution is $54,000, the demonstrated financial need is $39,000. Universities or colleges that commit to covering 100% of students demonstrated financial need will need to provide you with a financial aid package that's worth $39,000. 

You can apply for government grants when you fill out your Free Application for Federal Student Aid form (FAFSA). You'll have to complete that form each year that you're in school. 

When Would I Have to Repay a Grant?

While you typically don't have to repay a grant, there are some instances where you might have to. These scenarios include:

• -You left early from the program where you received your grant for
• -You received outside grants or scholarships that reduced your financial need
• -Your enrollment status has changed and made you ineligible or less eligible for a grant
• -You received a Federal Pell Grant from more than one institution at once
• -You got a TEACH grant but didn't fulfill its requirements 

Your college or university will let you know if you have to repay part or all of your grant. You'll usually have around 45 days to enter into a repayment arrangement or pay the grant back in full. You can either make payments directly to your school or the Department of Education. 

What Is a Scholarship?

A scholarship is another type of financial aid that you don't have to pay back. You can receive scholarships from the following types of places:

• -Employers
• -Schools
• -Companies
• -Individuals 
• -Community organizations
•  

Scholarships are offered in a wide range of values. You could receive one that's a couple of hundred dollars. You might get one that covers the entire cost of your tuition. 

One thing to remember is that scholarships are taxable. The amount of money you use to pay for textbooks and tuition might be tax-free. The money you use to pay for living expenses could get taxes. 

Scholarships can affect the financial aid you receive. Your entire financial aid combined can't amount to more than the total cost of attendance at your college. 

You'll have to let your college know if you've received a scholarship. They'll need to subtract the scholarship amount from your total cost of attendance. Any remaining amount can be covered by other financial aid sources. 

How Do I Qualify for a Scholarship?

How you qualify for a scholarship depends on various things. Certain scholarships are aimed at specific groups of people, like graduate students or people of color. The scholarship might also give you recurring money or a one-time award. 

You can discover more information on how much money you'd be awarded and who's eligible by visiting each scholarship's website. They'll also list any requirements you'll have to meet while you're in school to keep the scholarship. This could include:

• -Working a certain number of hours
• -Serving as an assistant to a professor
• -Being a member of a sports team 
• -Maintaining a specific GPA
•  

What Are the Most Popular Types of Scholarships?

You can receive a scholarship for a wide range of things, like volunteering or being involved in a club. However, the most common kinds of scholarships are based on athletic achievement or academic merit. 

Athletic Scholarships 

These types of scholarships are given to a student because of their outstanding performance. Students will typically have to play a certain sport to qualify for funding. The standards for each scholarship vary depending on what school you're going to. 

You can expect the following costs to get covered by an athletic scholarship:

• -Tuition 
• -Fees
• -Books
• -Room and board
• -Living expenses
•  

The amount you receive depends on whether you're offered a partial or full scholarship. Most scholarships cover a one-year agreement between the athlete and the college. Sometimes the agreement spans multiple years. 

Merit-Based Scholarships

Students can earn a merit-based scholarship by exceeding or meeting specific academic standards. These qualifications are outlined by the organization providing the scholarship. It could be based on your:

• -GPA
• -Field of study
• -SAT and ACT scores
• -Other academic achievements 
•  

This type of funding doesn't take the student's financial needs into account. Keep in mind that Ivy League schools don't issue academic merit-based scholarships. Some tips for improving your chances of qualifying for a merit-based scholarship include:

• -Apply at schools where you're in the top 10% of students 
• -Compare prices before picking a school 
• -Negotiate with schools if you were offered a scholarship by another
• -Consider schools with a higher acceptance rate
• -Look at out-of-state colleges 
•  

Where Can I Find Scholarships to Apply for?

There are countless scholarships available for you to explore. It takes a lot of patience and time to find them. 

The first step in your search is to know what types of places offer scholarships. The federal government doesn't offer scholarships. You won't be able to apply for this type of funding on your FAFSA form like you can with grants or loans. 

Some of the places you can look for scholarships include:

• -Your high school counselor
• -Your college's financial aid office 
• -Federal agencies 
• -Your state's grant agency 
• -Ethnicity-based organizations
• -Community and religious foundations
• -Local businesses
• -Professional organizations related to your career field
•  

What Do I Need to Apply for a Scholarship?

You'll need to fill out a separate application for each scholarship you apply for. On top of that, you might have to provide different resources and documents for each application. 

Don't forget that you're applying to receive free money. Putting in a little work is worth what you might receive. 

Some of the types of things you might be expected to prepare for a scholarship application include:

• -Portfolio
• -Essay
• -Letter of recommendation
• -FAFSA
•  

What Is a Loan?

Unlike the previous two options, a student loan is funding that you have to pay back. You'll make payments on the total amount you borrowed and any interest that might've accrued during that time. 

There are a few places where you might receive a student loan, including:

• -The federal government 
• -Financial institutions and banks
• -Other organizations
•  

What Kinds of Federal Student Loans Can I Get?

The Department of Education has a federal loan program called the William D. Ford Federal Direct Loan Program. There are four different types of loans under this umbrella. 

Direct Subsidized Loans

Undergraduate students can apply for a Direct Subsidized Loan. Your college will figure out how much you need to borrow. The amount you get loaned can't exceed your specific financial needs. 

One of the best things about a Direct Subsidized Loan is that you don't have to pay interest while in school or a deferment/grace period. The government will pay the interest on your behalf during that time. 

Once you enter your repayment period, the government won't make interest payments. Your repayment amount will include interest and the original loan amount. Interest won't start accruing until you enter into the repayment period. 

Direct Unsubsidized Loans

Graduate and undergraduate students can apply for a Direct Unsubsidized Loan. You don't have to demonstrate a financial need to qualify. Unlike a Direct Subsidized Loan, you're responsible for paying the interest at all times. 

Keep in mind that if you decide not to pay the interest during your deferment or grace period, or when you're in school, your interest will accumulate. It'll also be capitalized, which means it'll be added to your loan's principal amount. 

You might be wondering why anyone would take out a Direct Unsubsidized Loan since they'll be responsible for the interest for the entire life of the loan. As we mentioned, Direct Subsidized Loans are based on financial need. They're also only available to undergraduate students. 

If you're enrolled in a graduate program, you don't qualify for a Direct Unsubsidized Loan. You also won't meet the requirements for one if you don't have a financial need, even if you're an undergraduate student. 

Direct PLUS Loans

These loans are designed for parents of dependent undergraduates and graduate students. Another term for them is a parent PLUS loan when a parent takes the loan out. They're called grad PLUS loans when a professional or graduate student is issued one.

Some schools have different application processes for Direct PLUS Loans. Most colleges let you apply for them online. You or your child will need to have filled out a FAFSA before you apply for one.  

To qualify for a parent PLUS loan, you need to meet the following criteria:

• -Be the adoptive or biological parent of a dependent undergrad student 
• -Meeting eligibility requirements for student aid
• -Not have a poor or bad credit history 
•  

Parents can request a deferment so they don't have to make payments while their child is enrolled in college. They'll start making payments six months after their child leaves school or graduates. 

For a grad PLUS loan, students need to be enrolled at least part-time in a qualified school. They'll also have to be enrolled in a graduate program. 

Graduate students can start making payments on their loans six months after they:

• -Drop below the part-time enrollment
• -Leave school 
• -Graduate
•  

Interest will accrue on their loan while they're in school, during their grace period, and after that point. You can allow the interest to accumulate or make payments on it. 

What Are the Benefits of Student Loans?

Being smart about taking out a student loan is the most important thing in the process. The benefits of getting a loan include:

• -You don't need a cosigner or credit check on most loans
• -Fixed interest rate 
• -Repayment starts after you drop below part-time or leave school 
• -The government will pay the interest on some loans
•  
• You might be eligible to have part of your loans forgiven if you have a certain job.
•  

What Should I Think About When Getting a Student Loan?

Loans are legal obligations that you're responsible for. Even though you don't have to start making payments right away, you should understand the financial implications taking out a loan can have on your future. Follow these tips to be a responsible borrower:

• -Pay attention to how much you're borrowing
• -Understand your loan terms
• -Make your payments on time
• -Communicate with your loan servicer 
•  

Your loan servicer wants you to make your payments on time. If you're having trouble doing so, reach out to them. They'll have options available to ensure your loan stays in good standing. 

What's the Difference Between a Federal and Private Student Loan?

Private student loans are issued by banks and financial institutions. Federal loans get funded by the government. 

The terms and conditions of a federal loan get set by law. They include any benefits that you can't get with a private loan. This includes income-driven repayment plans and fixed interest rates. 

The lender of a private loan sets the terms and conditions. They also tend to be more expensive than a government-issued student loan. The disadvantages of private student loans include:

• -Make payments while you're still in school 
• -Fixed or variable interest rates that could be higher than federal loans
• -No subsidized options 
• -Established credit record needed or a cosigner 
• -Potential prepayment penalties 
•  

What Are the Differences?

We hope you have a good understanding of the basics of each type of financial aid. Let's talk about the main differences between each one. 

Loan vs. Scholarship

Scholarships are considered financial gifts that are based on merit or other types of achievements. You don't have to pay your scholarship back. The only exception is if you don't meet the requirements to keep your scholarship. 

Loans are money that you have to pay back. You'll also have to pay back interest on your loan amount. How much interest you have to pay back depends on the type of loan you have. 

Another difference is that a student loan check is often made out to you. You'll then pay for your books and tuition from that money. Another option is that the loan servicer will pay your college your outstanding fees and you'll receive the remaining balance. 

Students typically won't see any scholarship money that they see. The funds go directly to your college or university. 

For example, you might receive a scholarship that's for books at your college. You could receive credit at your school bookstore for that amount. 

Some service or independent organizations might write you a check. However, these are for scholarships that are relatively small in amount. 

Student loans also get paid in one large sum at the beginning of the school year. You could also receive money at the start of each semester. You might not receive the full scholarship amount upfront. 

Loan vs. Grant

Like scholarships, grants are funds that you don't have to pay back. You will need to pay back whatever funds you receive for your student loan over a predetermined period. 

There are fewer requirements students need to qualify for with a loan instead of a grant. Loans are in greater supply, so they're more easily accessible to a wide range of students. 

Grant vs. Scholarship

The biggest difference between a grant and a scholarship is that a grant is based on your financial need. Scholarships are awarded based on your merits, grades, or other achievements. 

The federal government issues a wide range of grants. However, they don't issue any scholarships. 

You can also apply for grants by filling out a FAFSA form. While you'll need to fill out the same form if you want to look into scholarships, each scholarship has a separate application process. 

Frequently Asked Questions

It can take a while to understand everything you need to know about grants, loans, and scholarships. Let's go over some of the most frequently asked questions. 

What Are the Pros and Cons of Grants?

While the requirements for a grant are different than scholarships, they still provide funding for those in financial need. Other pros of this type of financial aid include:

• -You can qualify for more than one grant
• -A simple application process
• -Additional opportunities for low-income communities and families 
•  

There are other things you should think about when applying for a grant, including:

• -Fewer grants available 
• -Highly competitive 
• -Limited funds
• -Typically won't cover your entire tuition cost
• -More restrictions on the use of funding 
•  

What Are the Pros and Cons of Scholarships?

Scholarships are a wonderful way to get funding for college that you don't have to worry about paying back. Some other advantages of this type of financial aid include:

• -There are many types of scholarships available 
• -Receiving a scholarship looks good on your resume
• -They provide more access to education to a large number of people

However, there are some things to keep in mind when you start applying for scholarships, such as:

• -Scholarship criteria can be subjective
• -Competition for scholarships is high
• -You have to put in a lot of time and effort
• -Scholarships might have a lot of requirements and conditions 
•  

That's why it's important to start researching and applying for scholarships early. 

What Are the Pros and Cons of Student Loans?

Student loans are typically the next step after you figure out what free funding you qualify for. The benefits of student loans include:

• -Easier to qualify for 
• -You can use the funding outside of tuition 
• -Build up your credit by making consistent payments 
• -Receive more funding than other options
•  

Taking out any type of loan is a major commitment. The disadvantages of getting student loans include:

• -You have to pay the funding back 
• -It can take a long time to pay back your loan because of interest rates
• -Defaulting or not making on-time payments can impact your credit
• -You might need to work while in school if your payments are due early
•  

How Much Money Can I Qualify For?

Grants and scholarships cover around $7,500 of a student's annual academic cost. $120 billion gets issued to students each year in the form of loans, grants, and work-study. That doesn't include the amount that's been issued for scholarships. 

How much funding you can receive could be more than you think. As we've said, student loans are designed to fill in the gaps that grants and scholarships can't cover. It doesn't hurt to apply for something because you never know what your chances are. 

Is There Scholarship and Grant Money That Goes Unclaimed?

Every year there is grant and scholarship money still left on the table. Most of the time it's because students don't fill out their FAFSA form. Filling out your FAFSA could potentially unlock grant opportunities for yourself. 

How Do Scholarships and Grants Work With My Financial Aid?

You need to let your college know about any scholarship you receive that's over $300. This is because grants and scholarships will affect how much total financial aid you receive. 

Don't consider that a bad thing. You'll have to borrow less in student loan payments because of that. 

You should let your college know about your scholarship or grant right away. Failing to report it could mean you'd have to pay back the "over-award."

Does My Family Have to Pay the Expected Family Contribution (EFC)?

No, your family doesn't have to pay the EFC. That figure is just an estimate that's used to determine how much financial aid you need. 

Your EFC gets calculated based on the data you provide on your FAFSA. It looks at multiple factors, such as:

• -Assets
• -Income
• -The number of people in your house
•  

What if My Financial Aid Amount Doesn't Cover My Expenses?

You're automatically awarded the maximum amount of aid you can receive based on your eligibility. This includes loans and grants. You'll need to accept whatever loans you've been offered to ensure you receive the funding. 

You can speak with your college's financial aid office if you're encountering unexpected academic expenses you can't cover. 

Learn Everything You Need to Know About Grants vs. Loans vs. Scholarships

We hope you now understand which options are better for you — grants vs. loans vs. scholarships. As you can see, relying on one option isn't always the best solution. Your financial aid future might include a mixture of all three options. 

The important thing to keep in mind about all three options is that you need to educate yourself. Each option takes a lot of research. Set yourself up for success by choosing the best option for your situation. 

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