How Is A Student Loan Different From A Scholarship? Which One’s Better?

If you have elaborate plans for higher education from a Grade-A institution, then chances are you are planning to take a student loan or even opt for a scholarship – or maybe do both. But before you can decide which one’s better, it is crucial to find out how is a student loan different from a scholarship.

Such doubts are pretty common, considering both loans and scholarships are the two most popular types of financial support that offer students multiple ways of covering tuition and additional expenses.

Additionally, while both financial support systems boost your educational goals, loans and scholarships have distinctive differences that all spiring students are aware of.

So, keep reading to find out more about how are student loans and scholarships different from each other.

How Do Scholarships Work?

So, how does any scholarship work? These are financial rewards that students get that typically cover the cost of books, tuition, and even living expenses at times. The best part about these scholarships is that they do not need repayment, essentially making them ‘free money.’

However, these awards are given based on different parameters like athletic ability, financial need, academic merit, or any other specific interest.

Moreover, most scholarships you will find are either need-based for helping students from low-income families or merit-based for helping students with excellent academic achievements.

Whatever the kind, winning any scholarship involves applying for the same. Such applications typically include recommendation letters, essays, and qualification proof.

Moreover, while some scholarships can be renewed, others are one-time – this means some scholarships cover only one-time payments, but others can get your funding for several years. Typically, any renewable scholarship comes with specific conditions, such as maintaining a certain GPA.

How Do Student Loans Work?

Unlike scholarships, student loans can be repaid, usually with interest, once a student is done with school. This is perhaps one of the most crucial differences between student loans and scholarships.

So, student loans are primarily of two kinds:

• Federal Loans.
• Private Loans.

Private student loans can help you access high borrowing limits accompanied by high interest rates; federal loans typically come with flexible repayment alternatives accompanied by low interest rates.

Like most financial aids, you have to apply for accessing any loan alternatives. So, for federal loan options, you must fill out and submit the Free Application for Federal Student Aid (FAFSA).

Moreover, once the loan gets approval, the money directly goes to the education institution. Once the student leaves school or drops out below the half-time enrollment, the bank gives a grace period to the student before the repayments begin.

How Is A Student Loan Different From A Scholarship? Differences Between Scholarships And Student Loans

So, how is a student loan different from a scholarship? Without wasting time, let’s check out the primary differences between student loans and scholarships.

1. Repayment Obligation:

The main difference between a scholarship and a loan is whether you have to pay the amount back. For scholarships, you can get financial aid for free and there is no requirement for repaying the same.

On the contrary, student loans need to be repaid. It can also accumulate a certain amount of internet over a period of time, increasing the overall amount that is owed.

2. Eligibility Requirements:

Unlike loans, scholarships come with specific requirements that make it nearly impossible for every single student to obtain one. For example, you might have to become a student with a certain degree or sit for a specific exam.

With student loans, relatively fewer requirements ensure that most students access one regardless of their extracurricular achievements or academic standing. For example, federal loans are given based on financial requirements. However, private loans typically depend on the credit history of the student or a co-signer.

3. Financial Source:

There are multiple entities that offer different scholarships for students – from nonprofits to corporations and even certain religious bodies. However, student loans are only awarded by private lenders or the federal government like banks.

4. Application Process:

Considering scholarships are typically limited, their application procedures are often selective and competitive. Moreover, applicants need to stand out somehow, depending on the kind of scholarship.

Generally, student loans are much less competitive. Plus, meeting the basic enrollment and financial criteria to perfect for securing one.

The Pros And Cons Of Scholarships:

This section is perhaps the most vital section – let’s check out the advantages and disadvantages of scholarships before you can make up your mind about the same.

Advantages Of Scholarships:

The advantages of scholarships are as follows:

A. Decreases Student Debt:

Even if most scholarships do not cover your overall study expenses, they can decrease the amount you will have to borrow.

B. Offers Recognition:

When a scholarship is awarded to you, it enhances your academic profile and resume.

C. Creates Potential For Renewable Awards:

If you get a scholarship that is renewable, you will be able to obtain consistent support through your education.

D. Widely Available:

While most scholarships have solid requirements, they are available widely. This is because there are several sources offering scholarships.

Disadvantages Of Scholarships:

The disadvantages of scholarships are as follows:

1. Conditional Renewal:

Before you can celebrate your renewable scholarships, you need to consider all the requirements. Typically, you would never be able to maintain a specific GPA for staying funded.

2. Time-Consuming Application: 

Applying for scholarships might need submitting letters of recommendation, comprehensive application forms, and essays.

The Pros And Cons Of Student Loans:

Now that you are aware of the advantages and disadvantages of scholarships, let’s check out the advantages and disadvantages of student loans.

Advantages Of Student Loans:

The advantages of student loans are as follows:

A. Bigger Funding Amounts:

Student loans can cover the overall expenses of education including living, housing, and tuition costs.

B. Develops Credit History:

If you pay back your student loans responsibly then it will help you to develop a solid credit history over a period of time.

C. No Immediate Payments Needed: 

Repayments usually start after graduation, enabling students to prioritize their education.

D. Offers Easy Accessibility:

Student loans are usually available to all students, regardless of their extracurricular or academic achievements.

Disadvantages Of Student Loans:

The disadvantages of student loans are as follows:

1. Long-term Financial Pressure: 

Depending on how much you have borrowed, repaying your loans can take years influencing your financial freedom.

2. Limited Protection For Private Student Loans: 

Private loans typically lack repayment flexibility and other protections such as student loan forgiveness programs that these loans often offer, making them relatively more risky during periods of financial difficulty.

How Scholarships And Student Loans Influence Financial Aid?

Taking student loans or applying for scholarships will impact your financial aid package. But how does that work out? Let’s find out how scholarships and student loans can impact your financial aid packages.

The Impact Of Scholarships On Financial Aid Packages:

When a student gets a scholarship, it decreases the total amount of other financial aid such as loans and grants for which the student is eligible.

Moreover, you can calculate the Federal financial aid based on the COA (Cost of Attendance) minus the EFC (Expected Family Contribution). So, if any scholarship is able to cover a percentage of the total COA, it can decrease the amount of any other aid you happen to be eligible for.

In addition, under the 1965 HEA (Higher Education Act), schools are needed to adjust the financial aid package of a student if their overall financial aid inclusive of scholarships exceeds their cost of attendance.

Now, this is called ‘over-awarding,’ and educational institutions need to make sure that no applicant should get more than needed to cover their educational expenses.

The Impact Of Student Loans On Financial Aid Packages:

Typically, student loans happen to be a part of bigger financial aid packages, popularly known as ?self-help? aid, since they must be repaid. So, this indicates that student loans do not impact the amount of any other aid like scholarships or grants that a student might be eligible to receive directly.

However, these are added to the overall amount of aid you will get. So, how is that possible?

Under Federal law, especially the FAFSA (Free Application for Federal Student Aid) rules, student loans are calculated after the student is done applying for work-study programs, scholarships, and grants.

This means that student loans are typically used for covering any remaining space between your total cost of attendance and financial aid package.

Student Loans Vs Scholarships: Which One?s Best For You?

So, now you know how is a student loan different from a scholarship – but which one’s best for you? Both student loans and scholarships are fantastic financial aid alternatives that can be perfect for getting you through higher education.

However, both can influence your financial freedom in different ways that you might have difficulty understanding at present. As a result, it is best to understand the differences between the two well and consult with a professional before making any necessary decisions.

Do your research, consult with experts, and definitely drop your queries in the comments if you need help!

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