Grant vs. Loan: A Complete Guide For Students

he main difference between grants and loans is the requirement to repay the funds.

A group of students in the class

With the rising costs of college, paying for higher education is becoming more and more difficult. Luckily, most students qualify for some form of financial aid. Two popular and widely accessible options available are grants and loans.

Key Takeaways

  • Grants and loans are both types of financial aid, but they have a few key differences.
  • Grants are essentially free money and do not need to be repaid, whereas loans need to be repaid with interest.

Breaking Down Grants

Grants are a form of free financial aid, meaning you do not need to repay them. Most grants are given out based on financial need, so students from lower-income households are more likely to receive a grant than those from higher-income families. The funds mostly come from the federal, state, and local governments and the schools themselves, with 42% of undergraduate students receiving an average of $5,179 in federal grants.

Major government-funded grant programs include the Federal Pell Grant, Teach Education Assistance for College and Higher Education Grant (TEACH), and Federal Supplemental Educational Opportunity Grant (FSEOG). If you live in California, you can apply for Cal Grants, which are government grants for students attending Universities of California (UCs), California State Universities, California Community Colleges, and select independent and career colleges. Private universities and colleges typically offer university grants you can use for tuition, books, housing, fees, food, or other education expenses.

Pros of Grants

  • Grants are free aid you can use for college expenses, such as tuition or housing.
  • It’s possible to receive more than one grant. For example, you can qualify for the Federal Pell Grant, Cal Grant, and a university grant.
  • Grants give students from lower-income families or communities the opportunity to pursue higher education at a lower cost.
  • Compared to scholarships, the application process for grants is relatively simple.

Cons of Grants

  • Grants are one of the most popular financing options for college and usually have a first-come, first-served model. If you do not apply early, the funds may run out.
  • Most grants are limited to students with demonstrated financial need, so not everyone will qualify.
  • Grants alone may not be enough to pay for all your college expenses.
  • Compared to scholarships, you may have fewer options when applying for grants.

You can apply for grants by filling out the Free Application for Federal Student Aid (FAFSA). FAFSA typically opens its applications on October 1st for the following school year, but this year, applications business grants will open in December. If you are a student, you’ll need to create a Federal Student Aid (FSA) ID, and so will your parents. After filling out the FAFSA, you’ll get automatically considered for most major federal grants.

Breaking Down Student Loans

Student loans are another type of financial aid, but unlike grants, you must pay back the money eventually, often with interest. Compared to grants or scholarships, loans typically have fewer requirements and are in greater supply, making them more widely accessible and one of the most common forms of financial aid. Students can also use them for a broader range of expenses, including tuition, books, and general living expenses.

Student loans are offered by the federal government and private institutions, such as banks and credit unions. Usually, you would take out a student loan after considering other free aid options. Federal loans have much lower interest rates than private ones and may provide various benefits, including flexible payments, loan consolidation, and deferred payments. You can take out federal student loans even if you have poor credit or a limited credit history.

Private loans, on the other hand, vary depending on the lender and do not have the same protections as federal loans. They may have higher interest rates and less benefits and flexibility. Additionally, if you have poor credit or do not meet their income requirements, lenders may require your parents to cosign on the loan.

With federal student loans, you do not need to make payments until you graduate, leave school, or become a part-time student. You can also set up an income-driven repayment plan, where you will make monthly payments based on your income and family size. There are a few scenarios where you can have your student loans forgiven if you are a teacher, government employee, medical professional, work in a non-profit, or have a disability.

Subsidized federal loans are available to students with demonstrated financial need. With subsidized loans, the government will pay the interest while you are still in school and during the grace period post-graduation. Unsubsidized loans are available to everyone, but the student has to pay all the interest. PLUS loans are offered to parents of students and graduate or professional students while Perkins loans are for students with significant financial needs.

Most private student loans are due while you are still in school, though some private lenders will let you defer payments until after you graduate. Popular lenders include Citizens Bank, Sallie Mae, College Ave, and LendKey.

Pros of Student Loans

  • Student loans are much easier to get compared to grants and scholarships.
  • Student loans are available to most students and may provide more money compared to other financial assistance options.
  • You can build up your credit history by taking out student loans.
  • The money can be used for a wider range of expenses outside of tuition.
  • You can pay for college with limited funds upfront.

Cons of Student Loans

  • Student loans eventually need to be repaid.
  • Some student loans may have higher interest rates than others, making them more costly and potentially take longer to repay.
  • If you do not pay off your loans on time or default on your loans, that can seriously damage your credit.
  • You may end up graduating with a significant amount of debt.

If you are applying for federal loans, you will need to submit the FAFSA. Once they review your data, you’ll get awarded financial aid based on financial need. The process for private student loans can vary depending on the lender, but you may need to provide documents on your finances and select your desired terms and repayment options.

Grants vs. Loans

The primary difference between a grant vs loan is that grants do not need to be repaid while loans require you to repay the money you borrow with interest. Think of a grant as a gift with conditions attached. As long as you use the grant for qualifying education expenses and do not drop out of school, you don’t need to repay the grant. For example, with the Pell Grant, you will need to partially repay the funds if you switch from begin a full-time to a part-time student or if you receive additional outside scholarships and grants after accepting the Pell Grant.

On the other hand, student loans are similar to a business transaction. The loans get issued by either the government or private businesses, but you must repay the funds at some point. If you can’t pay back your student loans, your credit will take a hit and you may have trouble qualifying for other loans in the future.

If you come from a low-income family, you are more likely to qualify for grants. For example, the Pell Grant is only available to undergraduate students with financial need. Typically, this is calculated using the Expected Family Contribution (EFC), which is based on your family’s income, assets, and benefits. If you or your family’s income exceeds a certain limit, you may not qualify for any grant money.

Most students qualify for federal student loans as long as they file the FAFSA. Your income, credit score, or parents’ income and assets do not matter as much. But, usually students with greater financial need are more likely to qualify for subsidized loans from the federal government. Subsidized loans have lower interest rates and more favorable terms than unsubsidized loans.

With private student loans, you must go through a loan application process where the lender will assess your credit history, income level, and assets. In this case, students with higher incomes and better credit will qualify for the best terms and rates. Low-income students may be less likely to qualify for private student loans.  

The Bottom Line

While grants and student loans are both financial assistance, they have key differences that may make one more suitable for you than the other. In particular, repayment can make a big difference in your future financial well-being.

We are not financial advisors. The content on this website and our YouTube videos are for educational purposes only and merely cite our own personal opinions. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial advisor if necessary. Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won't experience any loss when investing. Always remember to make smart decisions and do your own research!

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