What Is the Difference Between a Student Loan and a Grant?

Financing higher education requires understanding various financial aid options. Each type of assistance has distinct characteristics and implications, making it important to understand the differences for informed decisions about funding a college degree and managing future financial obligations.

Student Loans Explained

A student loan is money borrowed from a lender that must be repaid with interest. This creates a debt obligation for the borrower. Interest rates for federal student loans are fixed and set annually by Congress.

Federal student loans, provided by the U.S. Department of Education, include Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loans. Direct Subsidized Loans are for undergraduate students with financial need, where the government pays interest during enrollment and deferment. Direct Unsubsidized Loans are available to both undergraduate and graduate students, with interest accruing from disbursement. Direct PLUS Loans are for graduate or professional students and parents of dependent undergraduate students.

After graduation or dropping below half-time enrollment, most federal student loans provide a grace period before repayment begins. Borrowers are automatically placed on a Standard Repayment Plan, which features fixed monthly payments over a 10-year term. Various income-driven repayment plans are also available. Private student loans, offered by banks and credit unions, often feature variable interest rates.

Grants Explained

A grant is a form of financial aid that does not require repayment, often called “gift aid.” These funds reduce the cost of education without creating debt. Grants are typically awarded based on financial need, academic achievement, or specific criteria related to a field of study or student demographic.

Federal, state, institutional, and private organizations are common sources of grant funding. The Federal Pell Grant is a federal program for undergraduate students with financial need. Eligibility for a Pell Grant is determined by information submitted on the Free Application for Federal Student Aid (FAFSA).

The actual Pell Grant amount received depends on the student’s financial need, cost of attendance, and enrollment status. Grants from state governments, colleges, and private foundations may have additional eligibility requirements, such as specific GPA thresholds or enrollment in particular academic programs.

Comparing Loans and Grants

The fundamental distinction between student loans and grants lies in the repayment obligation. Loans are borrowed funds that must be repaid with interest, creating a financial liability. Grants, in contrast, are non-repayable funds that reduce the cost of education.

Eligibility criteria also differ significantly. Federal student loans are generally available to most students enrolled at least half-time in an eligible program, with some types requiring financial need. Private loans often depend on the borrower’s credit score or a creditworthy co-signer. Grants are typically awarded based on financial need, academic merit, or unique qualifications, rather than credit history.

The impact on a student’s future finances is another difference. Student loans accumulate interest and repayment obligations can extend for many years after graduation, influencing future budgeting. Grants, since they do not need to be repaid, directly lower the net cost of attendance and do not contribute to a student’s debt burden. This reduction in educational expenses can significantly improve a student’s financial position upon entering the workforce.

Sources for these financial aid types also vary. Federal and private lenders provide student loans, with federal loans from the U.S. government and private loans from financial institutions. Grants come from diverse sources, including federal government programs like the Pell Grant, state governments, colleges, and private scholarship organizations.