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Last updated August 24, 2023

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Grants vs Scholarships vs Loans

Key Takeaway

Grants and scholarships are "free money." Grants tend to be need-based, while scholarships tend to be merit-based, but that's not always the case. Loans need to be repaid. Scholarships and grants should be your first choice when financing your college education, followed by federal loans, specifically subsidized loans. Private loans, with higher interest rates and fewer protections, should be your last resort.

If you can’t pay for college out of pocket (hello, most of the world!), then you’re going to need to find a way to pay for tuition, room and board, and other expenses like books.

In general, you have three main options when it comes to money for college: scholarships, grants, and loans.

Before you accept any financial aid package, you need to understand the differences between these three types of aid.

Let’s get started.

Scholarships and Grants: what’s the difference?

Scholarships and grants are very similar.

They’re often mixed up because they are both funds that you don't need to repay. You can think of them as “free money.” When you’re seeking out financial aid, you should always look to scholarships and grants first.

So what’s the difference?

There really isn't much difference. Grants tend to be awarded based on financial need, whereas scholarships tend to be based on grades, talents, or other qualifications. There’s no definitive rule, though, and the outcome for both is the same: money for your education that you don’t have to pay back!

Scholarships and grants can come from schools, the government, or private groups.

While there isn’t the expectation that you will repay the amount you are given, there are sometimes additional stipulations—like maintaining a certain GPA, participating in a particular extracurricular, or signing up for a related major.

Scholarships and Grants Vs Loans

Loans, on the other hand, are money you borrow for your education. You “borrow” money because you have to repay it.

When you take out a loan, you not only have to repay the original amount you borrowed. You also have to pay something called “interest,” which is additional money that builds up on top of your loan until you pay the loan off.

Your interest rate can vary. The higher your interest rate, the more interest will accrue, and the more money you’ll have to pay back. Low interest rates are usually around 4-5%.

There are two main types of loans: federal loans, which are given out by the US federal government, and private loans, which are given out by private banks.

We never recommend taking out private loans unless you absolutely have to. They tend to have really high interest rates and worse repayment options than federal loans, which can make repaying them a lot harder.

Federal student loans tend to have lower interest rates and way better repayment options, including some pathways for loan forgiveness (like Public Service Loan Forgiveness). Federal loans come in three main types: subsidized, unsubsidized and Parent PLUS loans.

Subsidized loans: These are the best loans you can get. If you’re taking out loans, you want as much to be in subsidized loans as possible. “Subsidized” means that your loans will not start accruing (gaining) interest until after you’re done with school. Because they don’t gain interest while you’re in school, the total amount you have to pay ends up being less. The main con to subsidized loans is that not everybody qualifies for them. You’ll only be awarded them as part of your financial aid package if your family’s Expected Family Contribution falls below a certain threshold.

Unsubsidized loans: Unsubsidized loans are the next best option. They are similar to subsidized loans, but they do accrue interest while you’re in school. The final amount ends up being a bit higher than subsidized loans, but they’re still a better choice than private loans.

Parent PLUS loans: These are loans that parents or guardians can take out to help pay for their children’s education. You’re able to take out larger amounts with Parent PLUS loans—enough to cover the difference between the Cost of Attendance and what you can pay. Parent PLUS loans have higher interest rates than subsidized and unsubsidized loans, but they’re still a better option than private loans.

With all that loan information in mind, and in the midst of the ongoing conversation in the US about student debt, you’re probably wondering: should I take out loans for college?

Should I Take Out Loans for College?

The choice to take out loans for college is personal and depends on your situation. You need to consider your academic, social, and financial fit with the potential college before deciding to borrow money.

Ideally, scholarships and grants should cover as much of your college cost as possible. There are thousands of scholarships and grants available, and many go unused each year. The trick is to start looking early and apply for as many as you can.

When scholarships and grants don't cover all the costs, that's when you look at loans. Among loans, federal subsidized loans should be your first choice. They're the best option because of their low interest rates, and the interest doesn't start building until after you graduate.

Private loans should be your last option. They often have higher interest rates and don't offer the same protections as federal loans. So, while loans can help cover the difference between your financial aid and the cost of going to college, they also add to your financial burden in the long run.

This decision can be complicated, and it's important to understand what you're getting into. Think about your likely career path, starting salary, and how manageable loan repayments will be once you graduate.

As disappointing as it may be, if you don’t feel comfortable with the financial situation attending a specific college will put you in, you probably shouldn’t attend. The right college should be a great fit for you academically, socially, and financially. Financial stress can detract from your college experience and future financial stability, so it’s important to be thinking ahead when you’re looking at your financial aid options.


When financing college education, scholarships and grants should be your first choice as they're essentially "free money" and don't need to be repaid. If these don't cover all costs, look at federal loans, specifically subsidized ones, since interest doesn't accumulate until after you graduate. Private loans, with higher interest rates and fewer protections, should be your last resort. Ultimately, your college decision should be based on your academic, social, and financial situation, considering your likely career path and potential future debt burden.

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