The terms student loan and scholarship are often used interchangeably, but they are actually two very different things. A student loan is money borrowed from an institution (such as a bank or the government) that you need to pay back at an interest rate after graduation.
Scholarships, on the other hand, are funds provided by an organization or individual that don’t need to be paid back. To learn more about this distinction and which option is right for you, read on!
Table of Contents
- 1 Scholarships are grants, scholarships are free money
- 2 Scholarships are based on merit, loans are based on financial need
- 3 A scholarship does not have to be paid back
- 4 A loan needs to be paid back with interest
- 5 Loans have limits, scholarships do not
- 6 Student loans can affect your ability to get other financial aid in the future
Scholarships are grants, scholarships are free money
Scholarships aren’t loans—there are no interest rates or payments due. They don’t have to be paid back, ever. Scholarships are completely free money, with few exceptions. Your payback for getting a scholarship may simply be your time: many merit-based scholarships require that you keep up your grades in order to retain them.
Scholarships are based on merit, loans are based on financial need
As you know, most financial aid packages consist of some combination of scholarships, grants, and loans. Scholarships are based on merit while loans are based on need. In other words, students receive scholarships because they have performed well academically or demonstrated significant leadership skills (you may also hear them referred to as merit-based).
Students receive loans because they demonstrate financial need (or have none of their own money left to pay for college) and must therefore borrow money from either private banks or from a federal lender such as Sallie Mae.
A scholarship does not have to be paid back
Scholarships are often need-based, meaning that students who can’t afford to pay for college have access to money they wouldn’t otherwise be able to obtain. Some schools also offer merit-based scholarships, where students can win awards based on their grades or extracurricular activities—but even if you don’t get one of these awards, you aren’t responsible for repaying it.
A loan needs to be paid back with interest
Most scholarships don’t have to be paid back, but student loans do. When you take out a student loan, you’re borrowing money that you need to pay back later with interest, which can make your total debt load more burdensome than if you had relied on grants or scholarships alone. It’s also worth noting that not all scholarships are merit-based—you may qualify for some based on financial need, too.
Loans have limits, scholarships do not
There are limits to how much of your college education can be paid for by loans. With federal student loans, that limit is set at $31,000 (for undergrads); and it’s $57,500 with most private loans. Scholarships do not have any sort of cap; they do, however, come with specific strings attached. Some scholarships require you to maintain good grades or major in a particular field.
Student loans can affect your ability to get other financial aid in the future
Student loans are not eligible for Public Service Loan Forgiveness (PSLF) or Pay As You Earn (PAYE). If you work in government or non-profit, your student loans could become eligible after 120 monthly payments. However, if you’re in default on your student loans, you will lose eligibility for PSLF/PAYE. When it comes to repaying student loans, what type of degree you’re earning matters.
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