Credible takeaways
- Many students use a combination of scholarships and student loans to pay for school.
- Student loans must be paid back, while scholarships are gifts that don't have to be repaid.
- Borrowers should use any available grants and scholarships first, then use federal and private loans to cover remaining costs.
Student loans and scholarships are two different options to pay for college.
Roughly 30% of adults used student loans to cover their education costs, but student loans must be repaid, while scholarships are a debt-free way to pay for your tuition.
Understanding the differences between student loans and scholarships will help you make a more informed decision.
Current private student loan rates
What is a student loan?
A student loan is money you borrow to pay for college that you must repay with interest. There are two different types of student loans:
- Federal loans offered by the U.S. Department of Education
- Private loans offered by banks, credit unions, and other private lenders
What is a scholarship?
A scholarship is free money you can use to pay for your college education. Scholarships can be one-time gifts or renewable and cover multiple years of school.
Kevin Ladd, the chief operating officer of Scholarships.com, says you can use scholarships to pay for tuition and related expenses, including books, room and board, and other supplies.
“You will need to meet certain requirements to be eligible for them, and those requirements will vary greatly. But there are a lot of scholarships out there, and there's one for almost any topic or category you can think of,” he adds.
Student loans vs. scholarships: Key differences
The main difference between student loans and scholarships is that student loans must be repaid with interest, while scholarships never have to be repaid. This chart compares key differences between the two methods of funding your degree.
Pros and cons of student loans
Student loans make higher education accessible even for students who don't have the money to pay for it themselves. Most federal loans are available regardless of credit and offer low interest rates and borrower protections, including forbearance and forgiveness options.
Private loans can cover the full cost of attendance, so they're a good way to cover any funding gaps left after maxing out federal loans. However, private loans often charge higher interest rates and lack federal borrower protections. You also must meet your lender's income and credit requirements to qualify, or apply with a cosigner who does.
Unfortunately, you must repay both federal and private student loans with interest. If your debt is substantial, this can strain your budget and force you to delay financial goals like buying a home or starting a family.
Pros
- Make college more accessible
- Low interest rates, no required credit check, and borrower protections with federal loans
- Borrowing limits as high as the full cost of attendance with private loans
Cons
- Must be repaid with interest
- Can cause financial strain and force you to delay major milestones
- Private loans usually have higher interest rates and lack borrower protections
Editor insight: “Direct Subsidized and Direct Unsubsidized Loans are available regardless of your credit score. However, adverse credit can disqualify you from Direct PLUS Loans. I recommend completing your FAFSA as soon as possible after the deadline to try to maximize your eligibility for need-based aid, including subsidized loans.”
— Christy Bieber, Student Loans Editor, Credible
Pros and cons of scholarships
Scholarships offer numerous benefits since they’re essentially free money.
There are many different types of scholarships, including need-based, merit-based, athletic, and academic scholarships. However, applying for scholarships can be time-consuming due to the research required and time spent writing essays. And because there is limited funding available, scholarships can be highly competitive.
While scholarships can reduce your overall borrowing costs, they may not cover all of your college expenses.
Pros
- Free money
- Can reduce your debt burden
- Many different types are available
Cons
- Applying can be time-consuming
- Can be highly competitive
- May not cover the full cost of college
How scholarships and student loans work together to pay for college
When you’re planning how to pay for college, you should maximize scholarship and grant opportunities first.
“Parents and their students should begin searching for scholarships as early as possible and continue to find and apply for them throughout high school and college,” says Ladd. “It only takes a few minutes to create a profile and get matched to scholarships, and it's free.”
After exhausting scholarships, you can take out federal loans first, then use private loans to cover any funding gaps.
Unfortunately, scholarships can affect your financial aid offer.
“Some colleges practice scholarship displacement, where they reduce their own grants when a student wins a private scholarship,” explains Mark Kantrowitz, a nationally recognized expert on financial aid and scholarships and President of PrivateStudentLoans.guru.
“This can cause the student to need to borrow more to replace the scholarships and grants they earned. Six states have banned scholarship displacement to varying degrees, including California, Maryland, Minnesota, New Jersey, Pennsylvania, and Washington.”
Kantrowitz emphasizes the importance of responsible borrowing and understanding the costs so you’ll only borrow the amount you need. “Live like a student while you're in school, so you don't have to live like a student after you graduate.”
FAQ
Do scholarships affect financial aid eligibility?
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Can scholarships be used with student loans?
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Are scholarships taxable income?
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Are student loans ever forgiven?
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Which is better for paying for college?
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