Student loans and scholarships are two of the most popular types of financial aid. While student loans must be repaid after a student leaves school, scholarships are considered free money and typically don’t need to be repaid.
The cost of higher education has risen dramatically over the past decade. In 2022, the average cost of college in the United States is $35,331 per year. And unfortunately, that’s more than many students can afford to pay out of pocket.
Luckily, there are plenty of types of financial aid available to help reduce the cost burden of college, with student loans and scholarships being two of the most popular. In this article, we’ll explain how student loans and scholarships work and discuss the ways they’re different from one another.
Student loan vs. scholarship
Student loans and scholarships are both types of financial assistance that students can use to pay for higher education. But that’s where the similarities end since the two are very different when it comes to how they work, who is eligible, and who offers them.
The primary difference between student loans and scholarships is that student loans are a form of temporary financial aid that a student must pay back after they graduate or leave school. Scholarships, on the other hand, are free money that a student never has to pay back. If you’re looking for a scholarship, you can start with SuperMoney’s financial literacy scholarship.
How student loans work
A student loan is when someone borrows money from the government or a private lender to pay for their college education. But like other types of loans, it’s not a gift. The student will have to repay the loan when they graduate or leave school for any reason.
In most cases, student loans are deferred for as long as someone is in school. While you might start taking out loans at the age of 18, lenders generally don’t require that you start making payments until you’re done with school. But after graduation and a short grace period, you’ll make monthly payments on a set schedule until the loan is fully paid off. However, some private loans may require that you at least make interest payments while you’re in school.
Types of student loans
Student loans can first be classified as either private or federal loans.
Private loans are offered by private lenders, often to supplement federal loans. Like other private loans, these student loans are based on creditworthiness. Because many students don’t have much credit history, a parent or another adult is often needed to cosign the loan.
The other type of loan is a federal student loan, which is offered by the federal government to students who complete the Free Application for Federal Student Aid (FAFSA). Federal loans can also be broken down into a few different types.
- Direct Subsidized Loan. These loans are available to low-to-moderate-income students. With subsidized loans, interest doesn’t accrue while the borrower is in school.
- Direct Unsubsidized Loan. These loans are available to any borrower who has completed the FAFSA. With unsubsidized loans, interest accrues while you’re in school.
- Direct PLUS Loan. These loans are available to graduate or professional students or the parents of dependent undergraduate students. Parent PLUS loans are in the parents’ name, not the students’.
- Direct Consolidation Loan. These loans are available after a student has left school and allow someone to combine all of their federal loans into a single loan.
How to get student loans
There are generally two ways you can get student loans, and it primarily depends on the type of loan. In the case of a private student loan, the process of qualifying is similar to any other type of loan. You’ll have to complete an application and provide financial information. The lender will run your credit report, and if you meet the income and credit requirements, you’ll get the loan.
It’s worth noting that many college students don’t have a significant source of income, nor do they have long credit histories. Because of that, a lender may require a cosigner who promises to repay the loan if the student borrower doesn’t. In general, you can qualify for up to 100% of the cost of attendance at your school, which can include tuition, fees, books, and living expenses.
To qualify for federal student loans, you’ll have to complete the FAFSA. Students with demonstrated financial need can borrow between $5,500 and $12,500 in subsidized loans, depending on their school and ability to pay. Students can qualify for unsubsidized loans up to $20,500 per year regardless of their financial status.
Finally, the process of qualifying for Parent PLUS and other PLUS loans is similar to qualifying for a private student loan, where it’s based on creditworthiness.
Pro Tip
How scholarships work
A scholarship is a financial award students can apply for to help them pay for college. Unlike other types of financial aid, scholarship money doesn’t come from the government. Instead, they’re offered by many private organizations, non-profit organizations, companies, and universities. Scholarships are a form of gift aid, meaning you won’t have to pay them back after graduation.
Types of scholarships
In general, scholarships can be broken down into two categories: merit-based and need-based.
Most scholarships are merit-based, meaning you qualify for them based on some sort of achievement. Many scholarships award academic achievement, meaning you can qualify with a high grade point average (GPA) or test scores. Others are for athletic achievement, and schools may offer these scholarships to entice students to come to their school. Other merit-based scholarships are offered for community service, leadership, artistic ability, certain college majors, and more.
The other type of scholarship is a need-based one. These scholarships are less common than merit-based scholarships and are intended for low-to-moderate-income students.
How to get scholarships
Unlike with federal student aid, there isn’t one application you can fill out to apply for all scholarships. Instead, you’ll have to search for scholarships and apply to each one individually. There are many websites online that provide a list of scholarships all in one place. From there, you can read the requirements for each one and visit the website to apply.
In many cases, applying for scholarships requires completing not only an application but also an essay or another type of assignment. Depending on the scholarship, you may also be asked to provide letters of recommendation from teachers or coaches.
Pro Tip
3 differences between student loans and scholarships
Below we’ll dive a bit further into the major differences between scholarships and student loans.
| Scholarships | Student loans | |
|---|---|---|
| Repayment | Usually don’t need to be repaid | Need to be repaid with interest |
| Eligibility | Typically based on merit | Either based on need (federal loans) or credit score and income (private student loans) |
| Source | Usually private organizations and colleges | Federal government and private lenders |
1. Repayment
Perhaps the most important difference between scholarships and student loans is their repayment requirements. Scholarships are a form of free aid, meaning you generally don’t have to repay them. As a result, they’re generally more attractive than student loans.
Pro Tip
Student loans, on the other hand, must almost always be repaid. Most lenders, including the federal government and many private lenders, don’t require that you make payments while you’re in school. But after graduation and a short grace period — usually six months — you’ll have to start making monthly payments.
In most cases, you’ll have to continue making payments until the loan is fully repaid. However, in the case of a federal student loan, there are some options for having your loans forgiven. First, students on an income-driven repayment plan may have their remaining loans forgiven after 20 to 25 years of payments. And students in certain fields, including teachers and public servants, may have their loans forgiven — either in part or in full — after 5 to 10 years.
2. Eligibility
Not only do the eligibility criteria differ between student loans and scholarships, but they also differ for different types of student loans and different types of scholarships.
Here are the eligibility requirements for different types of student loans:
- Subsidized loans. Students must complete the FAFSA to qualify, and eligibility is based on financial need.
- Unsubsidized loans. Students must complete the FAFSA to qualify, but there are no income requirements.
- PLUS loans. Students must complete the FAFSA to qualify, and eligibility is based on financial need. Eligibility is based on creditworthiness, either for the parent or student.
- Private loans. Eligibility is based on creditworthiness, and students may need a co-signer if their income and credit history don’t allow them to qualify on their own.
Scholarships, on the other hand, often have different eligibility requirements for each opportunity. Some of these may include your race, gender, or field of study you wish to pursue. Be sure to review any scholarship you wish to apply for to ensure you are eligible.
3. Source
The final major difference between scholarships and student loans is where they come from. The most popular student loans are those offered by the federal government. The Department of Education maintains records of these loans while you’re in school, and once you leave school, the loans are transferred to a loan servicer that contracts with the government.
Other student loans come from private lenders. You can get private student loans from traditional banks and credit unions, but many of the most popular private loans today come from online lenders. They can often offer lower interest rates, better loan terms, and quicker financing.
Finally, scholarships can come from a number of private sources. For example, many universities offer scholarships to entice students to attend their school. Some companies offer scholarships for the children of their employees. And other private and non-profit organizations offer scholarships to local students, students with certain academic achievements, or students who plan to study a particular subject while in college.
FAQs
Which is better, scholarship or student loan?
Scholarships are generally a better option since you don’t have to pay them back. However, many students can’t fund their entire education with scholarships, and student loans can be a great supplement.
What is the difference between a need-based and merit-based scholarship?
A need-based scholarship is offered to someone based on their financial need, meaning the difference between the cost of their school’s attendance and the amount they can afford to pay out of pocket. A merit-based scholarship is offered to students with notable achievement, academic or otherwise, regardless of financial need.
What is the difference between a subsidized and an unsubsidized student loan?
With a subsidized loan, the federal government subsidizes the interest while you’re still in school, meaning your loans won’t accrue interest. But with an unsubsidized loan, interest will accrue the entire time.
What’s the difference between grants and scholarships?
Grants are often need-based and are typically offered by the federal government, state governments, and individual schools. Whether you qualify for federal grants is generally based on your FAFSA. Scholarships are more often merit-based and are also offered by private organizations and universities.
Key takeaways
- Student loans and scholarships are two of the most popular ways that college students today fund their higher education.
- Student loans can be offered by either the government or private lenders, but students must repay them when they leave school.
- Scholarships generally come from private organizations or individual schools and the money doesn’t need to be repaid.
- Both student loans and scholarships can be need-based in some situations, but scholarships are often merit-based, while student loans are widely available.
Check your options before deciding
Student loans and scholarships can both help college students finance their education. While scholarships are essentially free money, student loans require a student to go into debt, which must then be repaid when they leave school.
While federal loans are usually the first resort for student borrowers, they aren’t always available, especially if someone has used up the amount available to them or didn’t complete the FAFSA. In that case, private student loans are an option. Visit our private student loan comparison tool to see the top lenders, read reviews, and find the best lender for you.
View Article Sources
- Finding and Applying for Scholarships — Federal Student Aid
- Special Opportunities and Financial Aid — Education USA
- How to Get a Private Student Loan Without a Cosigner — SuperMoney
- How to Pay for College – 7 Ways to Reduce Student Debt — SuperMoney
- No Private Student Loan Forgiveness Options? Here’s 5 Alternatives — SuperMoney
- Ultimate Guide to Financial Aid — SuperMoney
- 2021 Student Loan Industry Study — SuperMoney
Erin Gobler is a Wisconsin-based personal finance writer with experience writing about mortgages, investing, taxes, personal loans, and insurance. Her work has been published in major outlets, such as SuperMoney, Fox Business, and Time.com.
