Studying in college can be an exciting experience for any student. But if there’s one thing that can diminish your enthusiasm and fill it with anxiety, it is concerns around your college funding. There are many ways to pay for college – through savings, scholarships, grants, federal student loans and private student loans.

The biggest difference between scholarships and student loans, is that student loans need to be paid back, plus interest. All student loans, both federal and private student loans, are required to be paid back and all student loans accrue interest. Scholarships, however, will lower your cost of college.

Here is the difference:

Scholarships: These are mostly merit-based, driven by academic and extra-curricular accomplishments. They also work as a “gift” to sponsor your college education, and do not need to be paid back.

Federal student loans: These are often need-based loans, and do need to be paid back after you leave college. Some student loans may be subsidized by the government. Regardless, they often offer lower rates of interest than private loans. Federal student loans also often come with many other benefits, including the option to make payments based on your income, potential for loan forgiveness, and options to pause payments during unemployment and economic hardship.

Private loans: These are offered by private lenders, such as banks, at often higher rates of interest than federal loans. The terms of repayment are also variable and depend on the lender. 

Here are some other things to keep in mind:

To apply for federal grants (do not need to be repaid) and federal student loans (need to be paid back, plus interest), fill out the FAFSA

The FAFSA form enables you to seek financial aid from the government. This captures your background details (like financial status of your family), so the government can review for providing need-based aid.

Finding grants and scholarships

There are a limited number of grants offered by the state and federal governments, and are hence awarded on a need basis. These are considered as “free money” as they do not have to be paid back, as long as you meet the grant’s eligibility criteria (like being enrolled in college full time, completing your degree with an acceptable GPA, completing teaching service as part of a TEACH grant, etc.).

If these terms are violated, then the grant is treated like a loan that needs to be paid back. Popular government sponsored grants include Pell Grants, Military Service Grants, and TEACH grants.

Scholarships share some similarities with grants, as they too are a gift that do not have to be paid back. However, the criteria can vary, based on need, merit, or a combination of both. Depending on how you use the money, scholarships may be taxable, too.

Student loans accrue interest

Regardless of their nature (government or private, subsidized or non-subsidized), all student loans accrue interest, and need to be paid back after your leave school. The terms of private loans depend on your lender. But for federal loans, students typically have a 6-month grace period after college, so you can find a job to fund your repayments. 

Also, all loans have eligibility criteria that need to be maintained throughout your college education (like being enrolled at least half time per semester, acceptable GPA bandwidth, etc.). Failing this, further loan disbursements will cease and you will also have to start making payments. 

In closing, use the FAFSA to reach out to as many possibilities for grants, scholarships and federal student loans. In some cases, a single scholarship or grant may not be sufficient to pay for your entire college education. 

If you have any questions on whether something is a scholarship or student loan, contact your financial aid department.

Did you know that scholarships are taxable? Use our Scholarship Tax Calculator to figure out the taxable amount of your scholarships and calculate how much you’ll have to pay in taxes. Amounts used to pay for tuition and textbooks may be tax-free, but amounts used to pay for living expenses are taxable.