How is a student loan different from a scholarship?
The students wonder how to pay for college typically turn to two key funding options: loans and grants. Borrowers are usually required to repay student loans with interest, while scholarships are free money, meaning you never have to repay them.
Even if scholarships don’t fully cover your college fees, they can reduce the amount you need to borrow, saving you money down the line.
Here’s a detailed look at the differences between student loans and scholarships – and how you can get started with both.
How scholarships work
Scholarships are a type of “gift aid,” and unlike need-based grants, they are generally merit-based. The application process varies for each scholarship, but you can start by completing the Free Application for Federal Student Aid, better known as FAFSA. You will need it to apply for most federal, state, or institutional scholarships. Some scholarships may require you to submit supporting documents, such as an essay, letter of recommendation, and resume.
The Ministry of Labor Scholarship search tool helps you sort through over 8,000 scholarships, grants, fellowships, and other awards. Some scholarships are for star athletes or top students, while others cater to specific groups like parents or students at home. When applying, think about what sets you apart.
Consider meeting with a college counselor and contacting local organizations to see what is available.
Do not be too long. Scholarship deadlines can be one year from the time you begin your first semester of college. Start tracking deadlines for scholarships you plan to apply to during the summer before your senior year of high school.
How Student Loans Work
Federal student loans come from the Ministry of Education and are the most common. They offer strong protections for borrowers, such as the ability to switch to a income-based repayment plan to potentially lower your future monthly payments based on household income and size.
You can also take away private student loans. Although you can sometimes get a lower interest rate on private loans, they do not offer the same level of borrower protection as federal loans. In addition, private student loans are not eligible for any federal student loan forgiveness program. Nevertheless, they are an option for any education expenses that remain after borrowing the maximum amount from the federal government.
How much could your student loan repayments be?
You must begin repaying most federal student loans six months after graduation. Each year, Congress determines interest rate for each type of federal loan, and you’ll lock in that rate when you first take out the loan. This interest rate will remain constant for the duration of your loan.
Interest is calculated differently for private student loans. Some lenders offer the same rate for everyone, while others vary the rate for each individual borrower. In these cases, the lowest interest rates are only available to those with excellent credit – or to those whose co-signer has excellent credit.
How to Apply for a Student Loan
Apply for Federal Student Loans
The first step to take out federal student loans: Complete the FAFSA. This one app assesses your eligibility for all types of federal loans and also registers you for any financial assistance based on need you may be eligible for, such as work-study programs, grants, and even certain types of scholarships.
Apply for a private student loan
Private student loans require a full underwriting process, similar to a car loan or other personal loan. They are offered by banks, credit unions, online companies and public agencies. Unlike federal loans, private loans consider a potential borrower’s credit score and finances, which means most students will need a co-signer, such as a parent.