Loans vs. Grants vs. Scholarships

Loans

A loan, in its simplest definition is money that is borrowed by a party and is expected to be repaid with interest. Colleges, banks and even the government have the choice to loan money to students at their discretion and terms. So while you may be able to attend college, it comes with a cost, and then some.

The most common type of loan is the Federal Perkins Loan, which is lent by the school, in your child’s name and with a maximum sum of $5,500 per year of undergraduate study. You cannot borrow more than $27,500 as an undergraduate. At a 5 percent rate, this federally-funded loan has relatively low interest and you have up to 10 years to repay it. If you are at least a half-time college student, you have nine months after you graduate, leave school, or drop below half-time status before you must begin repayment. There are no additional charges for a Perkins Loan – however, if your payment is late or do not make a full payment, you may need to pay a late charge plus any collection costs. Check with your college for the actual grace period if you are attending less than half-time or you are active duty in the military.

If the Perkins Loan does not sufficiently cover costs, you can apply for loans from private institutions. Sallie Mae offers the Smart Option Student Loan, designed to save money and help your child graduate with less loan debt thanks to two repayment options – the Fixed Repayment Option with in-school fixed payments of just $25 or the Interest Repayment Option that could save the lendee more than $8,000 compared to a traditional 15-year payment-deferred private student loan.

These are of course, just a few of the myriad loan programs out there – search for “loans for college students” and discover results – you will find a common denominator. There are severe consequences if loans are not paid back, so make sure you’re comfortable with all terms and conditions of a loan before signing the contract.

Grants

Grants can be acquired from a variety of sources. On the federal side, the most popular are Pell Grants. Award amount depends on the level of unmet need and can only be determined after you have completed the FAFSA. The Pell is offered exclusively undergraduate students from low-income families who have not earned a bachelor’s or professional degree and the maximum award can vary from year to year depending on program funding. The maximum Pell Grant for the 2015-2016 award year is $5,775. The amount you get depends on financial need, cost of attendance, status as full or half-time student, and your plans to attend school for a full academic year or less. Another option is the Federal Supplemental Educational Opportunity Grant (FSEOG), which is awarded to undergraduates with the greatest amount of unmet financial need who also qualify for the Pell. Unlike the Pell, FSEOG depends on the school’s funds and will not award students once those funds have run out – Pell grants are awarded to every eligible student. FSEOG awards range from $100 and $4,000 depending on the college and the Expected Family Contribution (EFC).

Like other federal grants, Iraq and Afghanistan Service Grants provide money to college or career students whose parent or guardian was a member of the U.S. armed forces and died as a result of military service performed in either Iraq or Afghanistan after the events of September 11, 2001. To qualify, you must meet the aforementioned criteria, as well as be under 24 years old or enrolled in a college at least part-time at the time of your parent’s or guardian’s death. Additionally, applicants must be ineligible for a Federal Pell Grant on the basis of their Expected Family Contribution but still meet the remaining Federal Pell Grant eligibility requirements. The 2015-2016 maximum award amount is $5,775 – the same as the Federal Pell Grant, but cannot exceed the cost of attendance for the award year. Due to sequestration, there may be slight changes in award amount, so make sure to research prior to application.

Lastly, there are grants targeted for specific students, such as the Teacher Education Assistance for College and Higher Education (TEACH) Grant, for those who plan on teaching in a high-need field in a low-income area. This is different than other federal student grants as it requires you to complete specific classes in order to get the grant, and then hold a specific job to keep the grant from turning into a loan. Applicants are expected to meet certain academic achievement requirements (for example, scoring above the 75th percentile on one or more portions of a college admissions test or maintaining a cumulative GPA of at least 3.25). Currently, TEACH grants up to $4,000 a year for students pursuing a career in teaching. Make sure you read the disclaimers carefully, as applicants must complete a service obligation once they receive a TEACH grant- failure to do so will result in the grant converting to a Direct Subsidized Loan, which would be repaid to the U.S. Department of Education with interested charged to the principle amount. To see if you qualify, simply complete a FAFSA.

Scholarships

Just like grants, scholarships do not require repayment and are awarded for almost anything. Seeing as though scholarships are what we know best (note our name), you’ll find plenty of advice on this subject all over our site but here are the most important things to consider.

First, strategize. Start by doing a scholarship search; by factoring in your child’s grade point average, test scores, special skills and interests, our search tool will generate a list of scholarships your child can realistically win. Some are easy while some require more time and effort.

Next, observe requirements and deadlines. Your child may be the ideal candidate but if their application arrives missing key elements or worse, late, someone who was more thorough may gain admission. Don’t underestimate the power of organization and neatness: If the scholarship committee can’t read your child’s writing or has messy materials, their chances are significantly reduced.

The final thing you can do is wait. Calling or e-mailing the committee won’t help – a parent with poor etiquette may actually harm their child’s chances of winning – but by all means have your child use this time to apply for other scholarships. If your child is lucky enough to win, encourage them to send the committee a handwritten note expressing their gratitude. If the award is renewable, have them do the same each year- if not, send a letter detailing how the scholarship has impacted their educational experience, when the award expires, and decide where the award should be invested.

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Last Reviewed: January 2020