Difference Between Student Loans and Grants

By: | Updated: Jan-26, 2022
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As you prepare everything to begin a new and important chapter in your life, one of the questions that will go through your mind is what is the best way to pay for the high costs of college? It’s no secret that college often comes at a hefty price, but luckily, there are more options for paying tuition than ever before. Two of the most common methods are student loans and grants. Both provide students with the funds they need to enrich their education. But how do they work? How are they different from each other? Is one better than the other? Let’s take a closer look at student loans vs. grants, what their main differences are and which option is right for you.

What are Student Loans?

Difference Between Student Loans and Grants

A student loan is when you apply to a lender and get approved for a lump sum of money. The lender disperses the money to your school at the appropriate time, like the start of a semester, and any leftover funds go to you. The extra funds go into your pocket, so you can use them for things like housing, personal expenses, school supplies and the like. You might also decide to send some leftover money back to pay down your principal (the initial amount you borrow) while you’re still in school.

The amount of funds you acquire is also determined by your EFC and COA. EFC stands for expected family contribution and COA means cost of attendance. An EFC is an index number that determines a student’s eligibility. Things such as taxes, assets and current incomes are all taken into account before a final number is given. The COA is pretty self-explanatory. It’s just how much it costs for you to attend college. How much it’ll cost for you depends on your degree, school, length of study and whether or not you live on campus. Once everything is processed, the financial aid department will subtract these two to determine how much you can get.

What are Grants?

Grants are another form of financial aid where the government gives students money for their college education. Like student loans, you have to apply for a grant through FAFSA. FAFSA stands for free application for federal student aid. However, grants are different from loans for a variety of reasons. For one thing, you don’t have to repay a grant as where you need to make routine payments for a student loan. There are few situations where you’d have to repay it. Withdrawing from your program and changes in your eligibility are to name a few reasons. Regardless, the school will tell you if and when you have to pay.

There are also private grants you can apply to from non-profit organizations. Private student grants are usually merit-based and you will have to apply and demonstrate financial need. There are also grants available for children of single parents, first-generation college students, people of color and more. Explore your options carefully. You never know what you may qualify for.

Types of Student Loans

While the purpose of a student loan remains the same, there are four different types of them. What sets them apart from one another are what they’re for and how they work. Below are the four types of student loans you can get:

  • Direct Subsidized: Direct subsidized loans are purely for undergraduate students struggling to pay for college. These loans come with lower interest rates, so they’re easier to pay back. Newer students won’t have to worry about interest rates by taking out this type of loan through a private lender. Private lenders offer reduced interest rates on their loans, which makes the responsibility more manageable for those on a budget.
  • Direct Unsubsidized: An unsubsidized loan is a more flexible student loan for all types of education, albeit undergraduate or graduate. The only real difference is that the requirements for eligibility aren’t based on financial need.
  • Direct Plus: Direct plus loans are typically given to those aspiring for a master’s or a doctorate’s degree. They’re also given to parents with undergraduate students to pay their expenses.
  • Direct Consolidation: A consolidation loan is simply when you combine everything into one loan. These are for students who have graduated and want to simplify their debt repayment strategy.

Types of Grants

As with loans, there are multiple types of grants you can receive with each one pertaining to different needs and situations. Here are the types of grants you can obtain:

  • Federal Pell Grant: These are the subsidized loans of grants. A Pell grant is for people who aren’t able to afford college by themselves and have no current degree.
  • FSEOG: A federal supplemental educational opportunity grant (FSEOG) are grants given directly from the financial aid department. The application process applies, but not every school gives these out. You’ll have to call around to see which colleges participate in the program.
  • Iraq and Afghanistan Service Grant: This is a special type of grant that gives people the funds necessary for their education. However, the qualifications are unlike the rest. You must first meet the Pell grant requirements while having a parent or legal guardian who was an active member of the military and died while on duty.

The Takeaway

The ultimate goal is being able to pay for the all-important higher education. But with so many available options at your disposal, it can seem a little overwhelming in making a decision. The truth is that there’s no right or wrong answer. While grants may not cover the full cost of education in most cases, you can combine them with loan options in order to avoid having to pay with your own hard-earned funds while you’re going to school.

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