Having someone else foot the bill for college sounds amazing, right? And it’s not as outlandish as you may think. With scholarships, you get a lump sum to cover some or all of your education costs, and you don’t have to worry about repaying the award. They’re fairly common; the National Center for Education Statistics reported that the average amount of grant and scholarship aid for first-time, full-time students enrolled in four-year programs was $15,960 for the 2020-2021 academic year.
You can use a combination of scholarships and student loans to pay for college. So, how are student loans different from scholarships? They differ in several key ways, including repayment terms, amounts, and duration.
What Are Student Loans?
Student loans are a type of loan specifically designed for college students and their families. They allow students to borrow money from a lender to pay for their education expenses, including college tuition, room and board, textbooks and other fees.
There are different types of student loans, but the two main categories are federal and private loans.
What Are Scholarships?
Unlike student loans, scholarships are a form of “gift aid,” meaning they don’t have to be repaid. When you earn a scholarship, you receive a lump sum of cash to pay for some of your education.
Scholarships are available from colleges, non-profit organizations and private companies, and they’re typically awarded based on merit, though some programs take into account financial need. You can earn a scholarship for a variety of reasons, such as your academic achievements, athletic skills or musical talent.
Differences Between Scholarships and Student Loans
Scholarships and student loans are common ways to finance a college education. But how is a student loan different from a scholarship? There are five major differences:
Repayment
Repayment is the key differentiator: student loans are repaid on a repayment plan. When you take out a student loan, you sign a legally binding agreement to repay the amount you borrow with interest in installments.
Scholarships, as a form of gift aid, do not have to be repaid, so they can decrease the amount of money you need to borrow to pay for school.
Important: Scholarships usually do not have to be repaid. However, the award issuer may require you to repay the award in certain circumstances. For example, you may have to repay the scholarship if you drop out of school or drop below full-time status.
Eligibility
To qualify for a student loan, you generally only have to meet citizenship requirements. And for private loans, you need to meet the lender’s credit and finance requirements. But anyone — regardless of their abilities or background — is eligible for a loan.
Scholarships are more selective. The issuer can set its own criteria for the award, so only students who meet its eligibility requirements can qualify. Some scholarships can be extremely specific. For example:
- The Redhead Scholarship is awarded to students with natural red hair, and it requires applicants to submit current photos and pictures from their childhood.
- The Chick & Sophie Major Memorial Duck Calling Contest is a scholarship for students who have strong academic records and are talented duck callers.
- The Harry and Ruth Houdeshel Memorial Flute Scholarship is for students enrolled in the Jacobs School at the Indiana University of Bloomington who are majoring in the flute.
Duration
Loans can be taken out for each semester, and student loans are repaid over several years. Depending on the type of loans you have and the repayment plan you’re on, the repayment term can be anywhere from five to 25 years.
Scholarships vary by program, but they can be awarded for a single semester or an entire academic year. Some are one-time awards, and others are renewable, meaning you can qualify for another year of the scholarship if you meet the program’s requirements.
Taxes
Since they have to be repaid with interest, student loans aren’t taxable as income. In fact, student loans can actually help you save money at tax time. If your loans are in repayment, you may be eligible for the student loan interest tax deduction. If you qualify, you can deduct up to $2,500 or the amount of student loan interest you paid during the year, whichever is less.
With scholarships, the rules are more complex. Scholarships aren’t taxable as income if they meet the following requirements:
- You’re working toward a degree at an accredited college or university
- The amount you receive is used toward tuition, fees, textbooks or required equipment for your program.
If you receive other scholarship dollars that cover room and board, travel or other expenses, that award amount is taxable as income and must be reported on your tax return.
Amount
Student loans are based on the school’s total cost of attendance and the student’s financial need. Depending on your situation, you could borrow money to cover the full cost of attendance.
Scholarships range in value; some awards are small, such as $500, and others can cover the full cost of your tuition.
So, Which Option Is Best?
As gift aid, scholarships are an excellent starting point for financing your education. They don’t have to be repaid, and you can reduce the cost of attendance by using scholarships to cover some of your costs.
However, scholarships are unlikely to cover the full cost of attendance, so you will likely need to take out some student loans as well.
How To Apply For Student Loans
The application process varies based on loan type. If you’re wondering how to take out student loans, here’s what you need to know:
Learn more: The difference between federal and private student loans
Federal Student Loans
You can qualify for federal loans if you are a U.S. citizen or eligible non-citizen. However, you must fill out the Free Application for Federal Student Aid (FAFSA) and submit it by federal, state, and school deadlines.
Federal loans tend to have more generous repayment benefits and borrower protections than other loans, but they have strict borrowing limits for undergraduate students.
Private Student Loans
Private student loans are issued by banks, credit unions and private financial institutions. Unlike federal loans, private student loan lenders consider a student’s income and credit when deciding whether to approve their loan application. As a college student, you may not meet the lender’s eligibility requirements by yourself, so you may need a parent or relative to co-sign the loan with you.
Private loans can cover up to the full cost of attendance for your program.
How To Apply For Scholarships
The process for getting a scholarship varies by program. Some are based on your academics or background, while others may require students to complete a scholarship essay to apply.
You can find potential scholarship opportunities through the following resources:
Once you find a scholarship, review the program’s requirements and follow the instructions to apply.
Learn More About Private Student Loans With ELFI
How is a student loan different from a scholarship? Now that you know the answer to this common question and how student loans work, you’re better prepared to plan for financing your education.
If you need to borrow money to pay for college, ELFI is an excellent source for undergraduate student loans, graduate loans, and parent loans. Review ELFI’s eligibility requirements and get a quote online.
