How Is A Student Loan Different From A Scholarship?

The most important thing to consider before applying to college is how to fund your education. If you can’t cover your tuition and expenses out of pocket, you’ll need to consider standard financial aid, such as a loan or scholarship.

Scholarship funds don’t need to be repaid, making them the best method of covering college expenses. On the other hand, student loans must be repaid once you leave school—and you’ll pay interest on the debt you accrue.

Before you begin your search, understand how scholarships differ from standard student loans.

What Is a Student Loan?

A student loan is funding that must be repaid with interest. Students can take out these loans from the federal government or a private lender, such as a bank, online lender, college or university.

Federal student loans are borrowed from the federal government and don’t require a credit check. These loans can come in several forms, including:

• Direct unsubsidized loans. These loans don’t require financial need to qualify. With these loans, interest accrues as soon as the loan is disbursed.
• Direct subsidized loans. For this loan type, interest charges are covered by the federal government if you’re enrolled at least half-time in college. They require students to demonstrate financial need.
• Direct PLUS loans. These loans are available to graduate students, professional students and parents of dependent students looking to fund their education.
• Direct consolidation loans. These loans allow you to combine your federal student loans into one loan and servicer for easier payment management.

For undergraduate students, direct subsidized loans and unsubsidized loans have interest rates of 5.50% for the 2023-24 school year, while graduate and professional students can expect an interest rate of 7.05%.

Look to private student loans after you’ve maxed out your federal student loans. If you have a good credit score, you can receive more favorable interest rates and terms than you’d receive with federal loans, but they lack the borrower protections that federal student loans have.

What Is a Scholarship?

A scholarship is a form of aid offered to students that doesn’t need to be repaid. You can receive a scholarship based on different factors, including academic achievement, athletic achievement and based on merit. Institutions may also award scholarships to students based on financial need and other circumstances.

Scholarships can originate from colleges or universities, non-profit organizations, government organizations or private companies.

5 Ways a Student Loan Differs From a Scholarship

Some forms of financial aid are better for students than others. Scholarships and grants don’t have to be repaid after graduation, while student loans do. Students should always exhaust their scholarship opportunities before taking out student loans.

However, it’s important to understand the difference between student loans and scholarships before you start looking for aid.

1. Eligibility and Requirements

All U.S. resident students are eligible for federal student loans. The federal government doesn’t have any income or credit score requirements for federal student loans, while private student loan companies almost always do.

Private student loans usually require a co-signer, or an adult with a steady income and good credit score, to assume financial responsibility for your loans if you default.

Scholarship eligibility requirements vary wildly depending on the provider. Some scholarships are intended for students with families that earn below a certain amount. However, many scholarships require students to achieve a certain GPA, standardized test score or class rank to qualify.

Niche scholarships can have more limitations than general academic scholarships. For example, a scholarship for band students may require that you’ve been part of your school’s marching band for several years to be eligible.

2. Application Process

To be eligible for federal student loans, students must fill out the Free Application for Federal Student Aid (FAFSA). The form asks for your parent’s financial information, including their annual income and total assets. Colleges will use that information to determine what kind of federal, state and institutional financial aid you qualify for.

Private student loan applicants must apply directly through the lender’s website. You’ll need to provide information about your parent’s financial status, just like you would for the FAFSA, but the application is separate.

Applying for a scholarship requires recommendation letters, transcripts and other submission materials. You also may need to devote more time to searching for scholarships you could qualify for.

3. Funding Source

Federal student loans come from the Department of Education, while private student loans are offered by various banks and lenders.

Scholarship funding comes from a variety of sources. Internal scholarships can come from the school’s endowment fund or individual donors.

External scholarships are funded by third-party companies, individuals, non-profit organizations or for-profit companies. For example, Coca-Cola awards $3.55 million in scholarship funds annually. Many local groups also create scholarship funds to support area students who are attending college in-state.

4. Repayment

Normally, students don’t have to repay scholarships. However, borrowers must repay loans unless they qualify for a loan forgiveness or repayment program. There are several loan forgiveness programs available for federal student loans, including the Public Service Loan Forgiveness (PSLF) program and the Teacher Loan Forgiveness program.

Most often though, you’ll need to repay your loans, whether they’re federal or private. You’ll also owe interest on those loans, so you’ll repay more than you initially borrowed.

5. How You Can Use Your Funds

Student loans and scholarships can be used for similar expenses, including tuition, fees, supplies, housing and more.

Some scholarships may have limitations on what you can use the funds for, so make sure you understand these rules before spending any money.