How Do Grants Differ From Loans When You’re Paying for College?

 July 27, 2020
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how do grants differ from loans

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If you’re one of the many Americans who can’t afford college without help, you’re probably looking at grants — as well as federal and private student loans — as part of your education funding strategy. But how do grants differ from loans?

Although grants (and scholarships) can be harder to find and secure, they’re a better option than student loans, which will need to be repaid over time and with interest. With that said, both grants and student loans could be integral parts of your college funding strategy.

To learn more, let’s look at the following questions:

How do grants differ from loans?

Answering the question “How do grants differ from loans?” is fairly straightforward. Grants for college are typically awarded by the government and other public or nonprofit institutions, and they may not have to be repaid. Student loans, on the other hand, are borrowed from the federal government, as well as banks and credit unions, and you must repay the money with interest.

Here’s some basic information about how grants differ from loans.


  • Usually awarded for a specific purpose
  • Typically don’t need to be repaid and don’t charge interest
  • Often limited in scope
  • Can be hard to get and usually require that you meet certain requirements or complete particular tasks


  • Borrowed money, usually used for a variety of education costs
  • Must be repaid with interest
  • Widely available
  • Relatively easy to obtain

How do grants work?

State and federal government agencies are the most common source of grants for college, but schools, private companies and other organizations also offer scholarship-like grant opportunities.

To get a grant from the federal government or a college, you must fill out a Free Application for Federal Student Aid (FAFSA).

All the information from your FAFSA is sent to your desired schools. If you meet the federal requirements for need-based grants, they’ll be offered to you as part of your financial aid package.

To nab state grants for college, you’ll also have to complete the FAFSA and, in some cases, the state’s similar but unique financial aid application. Contact your state’s higher education authority or your school’s financial aid office to clarify its grant opportunities and eligibility criteria.

Whether you find grants from the government, on campus or via a company or nonprofit, keep in mind that each opportunity is likely to have specific requirements and deadlines. You might also have to prepare application materials, such as an essay or proposal for how you’d use the funds. Typically, applying for a grant isn’t an overnight process.

Pros and cons of grants

The biggest advantage of a grant is the fact that it almost always doesn’t have to be paid back. Here are some other pros and cons of grants:

Pros Cons
● Reduce the student loans you have to borrow for college
● Relatively risk-free to your financial future
● Help reduce your out-of-pocket expenses
● Can help low-income students afford college
● In the absence of a large grant, applying for smaller grants that add up is an option
● Time-consuming to apply for private grants — and the return might not be worth the trouble
● Often awarded on a first-come, first-served basis, so even if you qualify, there might not be money left for you
● Often short-term awards and may not be renewable, so you have to apply again when you run out of money
● Might have strings attached to the money, such as an employment or service requirement
● Not all educational expenses might be eligible for grants

The Federal Trade Commission also warns that many advertisements you see for “government grants” are associated with financial aid scams. Before you apply for grants, it’s important to do your homework and make sure you’re dealing with a reputable organization.

How do student loans work?

When it comes to federal student loans, there are no credit requirements for direct subsidized loans and direct unsubsidized loans.

Direct subsidized loans are available to undergraduate students who demonstrate financial need. The federal government pays the interest on these loans while the student is enrolled in school at least half-time, for the first six months after graduation and during periods of deferment.

Borrowers don’t need to demonstrate financial need for direct unsubsidized loans. They’re available to undergraduate and graduate students, and borrowers are responsible for paying the interest on these loans at all times.

It’s also possible to get private student loans, but they have different criteria, including credit requirements. If you don’t have a lengthy credit history or a good credit score, you’ll likely need a student loan cosigner to qualify for competitive interest rates and loan terms.

Once you finish school, you have to start repaying your student loans. Some private lenders might even require that you begin repayment while you’re in college.

Pros and cons of student loans

The biggest advantage to federal student loans is that they’re easy to get. The first step to securing one is completing the FAFSA by the deadline. However, repaying student loans with interest is the biggest disadvantage of borrowing.

Other advantages — and disadvantages — of student loans include the following:

Pros Cons
● Help you pay for college, even if you don’t have access to scholarships or grants
● Some private student loans provide you with access to low interest rates
● Federal loans don’t have to be repaid until six months after you complete school
● Federal loans come with a variety of income-driven repayment options
● Some private lenders offer grace periods and hardship options
● You don’t have to accept the entire amount of student loans offered to you
● Student loan repayment can help you build your consumer credit history
● You could incur costly, long-term consequences if you default on your student loans
● Problems with repayment can affect your credit history
● Interest rates can be high and, while refinancing your student loans later can help, you might need a cosigner to qualify
● Limits on the amount of federal student loans you can borrow
● Credit requirements and other criteria can make it difficult to qualify for private student loans without a qualified cosigner
● Historically difficult to discharge student loans during a bankruptcy proceeding
● Private student loans come with fewer repayment options than federal student loans, and aren’t eligible for most student loan forgiveness programs
● Wage garnishment is a possibility if you default on your federal student debt

Whether the pros outweigh the cons is an individual decision. Because of these cons, however, student loans should be viewed as a last resort, only to be considered after racking up as much gift aid (like grants and scholarships) as possible.

Loan vs. grant: Which is best for your college funding strategy?

Grants help you afford higher education without creating a monetary debt, so they’re a better option than immediately borrowing student loans. Yes, finding grants takes more leg work than accepting a federal student loan on your financial aid award letter, or even applying for a private student loan, but it can be worth the extra effort.

Beyond grants, seek out scholarships and work-study programs that similarly won’t add onto your student loan debt. Leveraging your income or college savings accounts, if you have them, can also keep your finances safe from harm.

If these strategies aren’t enough to avoid student loans, take a moment to answer this question: Should you borrow loans to afford your desired school or consider a lower-cost campus? Staying closer to home (even for just the first two years of your education) or, better yet, attending “no loans” colleges and universities is a route worth considering.

Of course, you can get help along the way. High school and college guidance counselors, among others, are good sources of free college advice.

Andrew Pentis contributed to this report.

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