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Grant vs. loan vs. scholarship: Comparing the types of student financial aid

Daughter's graduation smiling with mother
Thomas Barwick/Getty Images

The growing costs of a college education is a challenge many are facing today, whether you're a parent, grandparent or college student. The tuition at private colleges is more than three times that of in-state public colleges (on average, a difference of $23,570 as of 2021). And it's important to note that the costs of tuition and fees at four-year private and public universities are on the rise. The cost of private schools has doubled since 1990. The cost of public schools has nearly tripled in that same time.

But tuition is only one part of the overall issue of cost of college. Additional costs may include:

  • Fees
  • Room and board
  • Textbooks
  • Computer and related supplies
  • Daily living expenses

Finding ways to pay for higher education can be a confusing mix of forms, acronyms and terms you rarely use in any other aspect of your life: What is the difference between a grant vs. loan? Is a grant or loan better compared to other aid options? How will we save enough to keep up with rising college costs? All of these are good questions, but financing college doesn't have to be confusing. Getting organized and clarifying basic terms can help you get started.

Starting early: The value of college savings

For the most part, you can't apply for grants, scholarships or loans until a student nears high school graduation. But you can start saving for college at any time. In fact, prioritizing and planning for college costs can be a family effort. College savings efforts may start even before a child is born, but a key launching point is when you sit down and begin a savings plan. A college savings calculator and working with a financial advisor can aid you with that discussion by helping you determine your needs and contribution options for a savings plan.

Every dollar you save is a dollar you won't have to find in grants, scholarships, loans or work-study programs later. Thanks to compounding interest and the tax benefits of 529 educational savings plans, those dollars might be worth even more.But applying for these types of financial student aid can help lessen the burden of increasing college costs.

Grants for college

Many grants are like free money that students can use for college expenses. Grants are sources of financial aid that generally do not have to be repaid and while most are need-based, some focus on abilities, hobbies, ethnicity, religion or another characteristic. Need-based college grants come from the federal and state governments and begin with submitting a Free Application for Federal Student Aid (FAFSA). Once you've filled it out, a school will consider your expected family contribution, an indexed number that estimates how much your family can pay toward your education, to help determine how much financial aid you're eligible to receive.

Like all forms of financial aid, there are important things to know about college grants:

  • You don't need to pay this aid back (unless, in some cases, you drop out of class).
  • You may be eligible for multiple grants.
  • Depending on your financial need and college choice, grants can pay for a significant amount of your higher education costs.

College scholarships

College scholarships typically are awarded based on merit—academics, athletics, hobbies—and do not need to be paid back. Scholarships can come from colleges, private organizations or individuals. Some of them pay for all college expenses while some only pay for certain portions. Scholarships are among the best options for student financial aid as they don't have to be repaid and there is a wide variety of options available.

Most scholarships are one of two different types:

  • Automatic. These scholarships are merit-based and are usually awarded to students who meet certain academic criteria, such as a high GPA or test scores. If students meet the required criteria, they are automatically considered for these scholarships once they apply to a particular school.
  • Non-automatic. These scholarships are more competitive as they are typically awarded based on non-academic criteria, such as athletic accomplishments, ethnicity, gender, leadership skills or community service, among others. Students must apply and demonstrate they are qualified, but they are not automatically awarded the money even if the criteria are met. However, students can apply for as many non-automatic scholarships as they'd like, increasing their chances of receiving multiple scholarships and putting that money toward their education.

Here's what to keep in mind about college scholarships:

  • You do not need to pay back a college scholarship.
  • Students can often find niche opportunities even if they wouldn't otherwise qualify for traditional academic or athletic options.
  • You can apply for as many college scholarships as you have the time to do so.

Work-study opportunities

Work-study programs allow students to gain valuable work experience as they earn money for college through on- and off-campus jobs. There are two types of work-study:

  • Federal Work-Study. Through this financial aid program, the federal government subsidizes student pay for employers that provide part-time jobs for students with a demonstrated financial need. Students can apply for the program by submitting a FAFSA. However, being approved to receive these federal funds does not guarantee a job. Students must look for and apply to jobs on their own, and schools will often help them.
  • Student employment. On- and off-campus jobs are open to all students and can provide additional money that can go toward the costs of attending college. Like the Federal Work-Study program, students must seek out and apply for jobs on their own. While not affiliated with any type of public or private financial aid program, many schools have student employment departments that help students find part-time job opportunities while attending college.

Here are the considerations to know for work-study programs:

  • You can earn valuable job experience during college.
  • Work-study can give students an opportunity to make new friends at college.
  • Work-study is often done with employers who understand the demands on students and provide flexible work hours.
  • Some students may struggle to balance work and schooling, so they need to go into any employment with a clear idea of how much work they are able to do while attending college.

Student loans

Student loans are another important option for families looking to pay for college costs. The two broad categories of student loans are federal and private. Because federal loans are backed by the federal government, they usually offer lower interest rates and multiple protections for borrowers. Private loans can come from banks, online lenders, colleges and other entities. They often have higher interest rates and may lack the same borrower protections as federal loans. It's generally better to start with federal loans (which you receive access to do by submitting a FAFSA). Typically, you'll find three types of federal college loans:

  • Direct unsubsidized Stafford loans. These are awarded without consideration of need. Like other debts, they accrue interest once the money is received.
  • Direct subsidized Stafford loans. These are awarded based on financial need. The government pays the interest while a student is in school and during any deferment period.
  • Direct Parent PLUS loans. These are for parents of undergraduates who are 24 years old or younger. They usually have higher interest rates and fees.

For Federal Direct Student Loans, there are annual and aggregate maximum loan limits. The annual maximum is based on a student's grade level and whether or not they are a dependent. For instance, dependent freshmen can borrow up to $5,500 total in the academic year whereas independent freshmen can take out a maximum of $9,500. The aggregate limit for independent students throughout their college career is $57,500, and goes down to $31,000 for dependent students.

If additional money is needed beyond those limits, parents can supplement remaining college costs with a direct Parent PLUS loan or look into private options.

When comparing a grant vs. loan or other types of financial aid, it's important to know the following about student loans:

  • Loans can be used to pay for living expenses whether you're staying in the dorms or in off-campus housing. This includes costs for school books, supplies, and equipment along with transportation to and from school, child care and even study abroad costs.
  • Students may build credit as they pay off loans.
  • Loans must be paid back. For federal direct Stafford loans, students generally get a six-month grace period after graduation before they need to begin repayment. They can also get an additional deferment if they go back to school (to pursue a graduate degree, for example). Student borrowers generally have 10 years to repay the loan but other repayment options do exist.
  • Most private loans require co-signers.

Sort out your options with professionals

As you begin to plan your family's strategy for paying for college, it's important to talk to someone with experience helping families work toward this goal. Find a Thrivent financial advisor near you to help you through this process.

  1. Offered through a brokerage arrangement with Thrivent Investment Management Inc., 529 college savings plans are not guaranteed or insured by the FDIC and may lose value. Consider the investment objectives, risks, charges and expenses associated before investing. Read the issuer's official statement carefully for additional information before investing. Investigate possible state tax benefits that may be available based on the state sponsor of the plan, the residency of the account owner, and the account beneficiary. Consult with a tax professional to analyze all tax implications prior to investing.