Student Loans vs. Financial Aid

As of early 2020, student loan debt in the nation had reached more than $1.5 trillion. More than 44 million individuals have student loan debt, and the average person with student loans owes a bit over $32,000—which is more than half of the average household income in the United States. As a new school year approaches, more individuals are searching for ways to fund their education without going into debt for years. Luckily, student loans aren’t the only way to get help paying for college.

Learn more about student loans vs. financial aid below, and get some information about various ways to help fund your education.

Student Loans vs. Financial Aid: What’s the Difference?

Both student loans and financial aid can come from the federal government or the private sector. The main difference between student loans and financial aid is whether or not you need to pay back the money you are given. Student loans generally require that you pay back the loan with interest, while financial aid packages like scholarships and grants typically do not need to be paid back.

That distinction can make a big difference. “Every dollar you receive in scholarship or grant form is a dollar you don’t have to pay interest on,” says Zina Kumok, an editor at Dollar Sprout. And saving that money opens up possibilities after graduation, too. “Students who don’t have to take out as many loans will have more career options and afford to start their own businesses, work in lower-paying fields, or even take time off to travel abroad.”

But as with any financial agreement, make sure you understand the terms upfront before signing anything. Not all financial aid comes without strings.

How to Apply for Financial Aid

To qualify for federal loans and other types of federal financial aid, you’ll need to fill out the Free Application for Federal Student Aid (FAFSA). You might need to complete the FAFSA with some of your parents’ income information if you are still a dependent.

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    To apply for private loans and financial aid, you must research the program in question and complete the appropriate application process. For example, academic or extracurricular scholarships are often offered by various colleges and universities. You’ll have to look on those university websites or contact financial aid departments at various schools to find out about how to apply to these programs. Scholarships offered by private organizations will have their own processes as well.

    Student Loans

    Student loans provide credit extended to you or your parents for the purpose of paying for college. Student loans do have to be repaid, but typically not until you’re out of school. In some cases, such as if you’re going to work in certain public sectors, you might be able to apply for a student loan forgiveness program.

    Subsidized and Unsubsidized Federal Loans

    When you apply with the FAFSA, you may find out you qualify for federal loans. Subsidized federal loans tend to have slightly better terms than unsubsidized loans. Another benefit of a subsidized loan is that the interest on it is covered by the Department of Education as long as you meet enrollment requirements. The amount you can borrow is limited, and interest rates range from 2.75 to 4.3%.

    Learn more about federal student loans and economic protections from COVID-19: What You Need to Know about CARES, HEROES, and HEALS.

    Private Student Loans

    If you don’t qualify for federal student loans or want another option, you can apply for private student loans from commercial lenders. Whether you can get approved for these loans or get favorable terms and rates might depend on your credit score.

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    Financial Aid

    Financial aid takes many forms, and most often does not need to be paid back after you graduate. These types of aid can be offered by your school, other private institutions, or the government. They are most often divided into needs-based aid and merit-based aid.

    When applying for any type of financial aid, you will need to research the deadlines, requirements, and payment specifics carefully.

    Be wary of scholarship and other aid programs that charge fees. “Fees are a dead giveaway of scholarship scams,” says Doug Whiteman, editor-in-chief at “Be very careful about handing over a credit card number or other personal information.”


    Scholarships are awarded for need or merit, and they’re offered by a wide range of organizations. Schools, private businesses, local and national associations, religious organizations, and charities are all potential sources for scholarships. Most scholarships do not require you to pay them back.

    “Students should be more aggressive about applying for scholarships,” says Kumok. Whiteman agrees, citing a recent New York Times article that estimates there are 44,000 private scholarship programs. “The typical student probably has no idea that there’s so much money available,” he says. “Too often students and their families have seen student loans as an easy fallback, before they’ve fully explored scholarship and other financial aid possibilities.”


    Grants are a type of financial aid that you typically don’t have to pay back. Federal and state governments offer grants, as do private and nonprofit organizations. Make sure to do ample research to ensure you get your application right, and pay attention to the grant terms. While many grants don’t have to be repaid, some do.

    Be careful not to depend fully on grants, though. “Grants might not be available for the length of your degree program,” advises Anna Serio, a staff writer at “Some only cover the first year, while others are only available during the second, third, or fourth year of school. Even if a grant program covers all four years, you might have to reapply every year to be considered.”

    Work-Study Jobs

    Work-study jobs help you pay your way through school or cover expenses. Some work-study jobs are paid internships, where you practice skills and knowledge you’re learning in school or for your future career. Others might simply be on-campus jobs in dining halls, fitness centers, tutoring or writing centers, or other areas.

    “Work-study programs are best for students who want to build up their resume,” says Serio. “Work-study makes it easier to land a job without experience or in a new field if you’re in graduate school. Sometimes, work-study jobs can turn into a regular part-time or even full-time position.”

    Tax Credits

    If you pay qualifying expenses for school, you may be able to claim a certain amount as a tax credit to reduce your tax burden or even get a refund. The American Opportunity Credit, for example, allows up to $2,500 credit per eligible student, while the Lifetime Learning Credit allows qualified individuals to claim up to $2,000 for qualified education expenses per tax year.

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    State Aid Programs

    Almost every state offers grants or other financial aid opportunities for college students. The National Association of Student Financial Aid Administrators provides a detailed list of state financial aid opportunities.

    Institutional Assistance

    Schools may offer many of their own programs, but they aren’t always well published. When you’re in the process of considering and visiting schools, during the application process or even after you’ve been accepted, make it a point to visit the financial aid office. School financial aid officers can help ensure you’ve applied for all applicable financial aid.

    Employer Education Assistance

    If you’re already working, your employ might offer funding for education. Some employers have programs that cover all or part of the cost of degree programs if you agree to work for them for a certain amount of time. Others pay for training seminars, workshops, and one-off classes that are likely to make you a more valuable employee. Talk to your supervisor or human resources department to find out if your employer offers such benefits.

    Other Programs

    Leave no stone unturned when seeking financial aid for college. Numerous programs exist to help fund education for people in specific situations.

    For example, the Educational and Training Vouchers Program provides assistance to those who are or were in foster care. The National Health Service Corps Loan Repayment Program helps pay for student loans for those who work at Indian Health Services facilities. Be creative! The Tall Clubs International Foundation has a scholarship program for college women who are 5’10” tall and men who are at least 6’2”. Consider what makes you unique and look for scholarship opportunities that may reward you for it.

    Tuition-Free Schools

    Did you know that there are also some tuition-free schools around the United States? Residents of certain states may qualify for free tuition programs. Be sure to do your research into these schools, as you would with any other. “The programs in the US often require you to work in exchange for your degree,” says Serio. “This can help you develop valuable skills and gives you a leg up entering the job market after you graduate.”

    Get the Financial Aid You Need

    If you need help paying for schooling, there are plenty of financial aid options available to you. Reach out to your school’s financial aid office for assistance and direction. If you’re interested in learning more about student loan options, you can look through our resource center for more information.

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