According to the Institute for Higher Education Policy, even families that earn more than $100,000 per year can’t afford 59% of colleges in the U.S.
If you’re one of the many Americans who can’t afford college without help, you’re probably looking at grants, federal student loans, and private student loans as part of your education funding strategy. But how do grants differ from loans?
We’ll walk you through the key differences between grants and student loans so you can make the best decisions for your situation.
How do grants differ from loans?
Answering the question “How do grants differ from loans?” is fairly straightforward. Grants are free money, and they don’t have to be repaid. Student loans, on the other hand, are borrowed, so you must repay the money with interest.
Here’s some basic information about how grants differ from loans, along with pros and cons of each option.
- Are free money, usually awarded for a specific purpose
- Don’t need to be repaid and don’t charge interest
- Are often limited in scope
- Can be hard to get and usually require that you meet certain requirements or complete particular tasks
- Are borrowed money, usually used for a variety of education costs
- Must be repayed with interest
- Are widely available
- Are relatively easy to obtain
How do grants work?
“Grants are normally from the federal or state government, but you can also pursue grants from foundations and corporations,” said Leslie Tayne, a debt attorney with experience in student loans. “Guidelines for obtaining a grant vary depending on the potential funder.”
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.
“In addition to the federal government, many states as well as colleges and universities offer their own grants,” said Christopher Tremblay, an independent education consultant with college planning service Estrela Consulting. “You might have to fill out a separate grant application for state or college grants, although some will use the information from your FAFSA. Research the process at your desired schools.”
Tayne also suggested looking for grants from local organizations and other agencies. However, it’s important to consider the requirements and deadlines. “Many private grants require essays or proposals, and you have to meet very specific criteria,” Tayne said.
Pros of grants
The biggest advantage of a grant is the fact that it doesn’t have to be paid back. Here are some other upsides of grants, according to Tayne and Tremblay:
- Grants help reduce your out-of-pocket expenses.
- Grants can help low-income students afford college.
- Even if you don’t receive a large grant that covers all your college costs, you can apply for smaller grants that add up.
- Grants reduce the student loans you have to borrow for college.
Cons of grants
Tremblay and Tayne both pointed out that you need to be careful when you apply for grants because:
- It can be time-consuming to apply for private grants — and the return might not be worth the trouble.
- Private and institutional grants are often awarded on a first-come, first-served basis. So even if you qualify, there might not be money left for you.
- Grants are often short-term awards, so you have to apply again when you run out of money.
- There might be strings attached to the money. 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 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 govenment pays the interest on these loans while the student is in 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 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 of student loans
The biggest upside to federal student loans is that they’re easy to get, said Tayne. “They help you attend the school of your dreams when you might not otherwise be able to afford it,” she said.
Other advantages of student loans, according to Tremblay, include the following:
- They 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 federal student loans offered to you.
Cons of student loans
Repaying student loans with interest is the biggest disadvantage of borrowing.
However, that’s not the only reason to be careful about using student loans as part of your college funding strategy, said Tayne and Tremblay:
- You could incur costly penalties if you default on your student loans.
- Problems with repayment can affect your credit history.
- Interest rates can be high. Refinancing your student loans later can help, but you might need a cosigner.
- There are limits on the 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.
- It’s almost impossible 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 student loan forgiveness.
- Wage garnishment is a possibility if you default on your federal student debt.
“Loans should be avoided if possible,” said Tremblay. “Plan to have the least amount of loans in order to avoid being in debt for 10 years or more if you can’t afford to pay off your education sooner.”
Student loans vs. grants: Planning your college funding strategy
“Always apply for all the free money you can get,” said Olivia Valdes, an independent college consultant and founder of Zen Admissions. “Start with grants and scholarships. Once you’ve exhausted those options, students and their families should discuss the viability of taking out loans.”
For merit-based scholarships and grants, Valdes said, individual colleges often rely on your test scores and high school transcripts and the information you provide on your entrance application.
Frederick Pierce, president and CEO of student housing company Pierce Education Properties, pointed out that it’s possible to get help putting together a plan that works for you.
“Many students work with guidance counselors, financial planners, and the financial aid offices at universities to assemble a package of financial aid,” Pierce said. “Start with grants and scholarships, and then turn to loans to cover the difference in costs.”
Both Valdes and Pierce said there are other ways to pay for college besides relying on grants and loans. They recommended saving up when possible as well as working at least part time during college.
On top of that, Pierce suggested re-evaluating the school you attend.
“The average aggregate debt burden for those who graduate public universities with outstanding loans is less than $30,000,” Pierce said. “With the right approach, it’s possible to pay for college using multiple strategies and reducing your total education debt.”
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|1 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
2 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 2/1/2019. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
6 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|4.23% – 13.23%1||Undergraduate and Graduate|
|4.20% – 11.44%2||Undergraduate, Graduate, and Parents|
|4.84% – 13.49%3||Undergraduate and Graduate|
|4.50% – 10.11%*,4||Undergraduate and Graduate|
|4.25% – 13.25%5||Undergraduate and Graduate|
|5.85% – 6.99%6||Undergraduate and Graduate|
|3.95% – 9.81%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.42%8||Undergraduate, Graduate, and Parents|