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Financial Aid vs Student Loans: What You Need To Know

When it comes to financial aid vs. student loans to pay for college, what’s the difference? Here's what you need to know about this important topic.

As you consider how to pay for college, it can be challenging to determine how to get the funds you need. However, it’s possible to get help from financial aid, including student loans.

So, when it comes to financial aid vs. student loans, what’s the difference? Let’s take a look at what you need to know about this important topic.

Financial aid vs student loans

First of all, it’s important to understand that people who are paying for school often have to differentiate between federal and private student loans. That matters when you consider financial aid vs. student loans because federal student loans are often considered part of a financial aid package, while private student loans aren’t.

Federal financial aid

In general, federal financial aid includes the following:

You can access those programs by filling out the Free Application for Federal Student Aid (FAFSA). When you fill out the FAFSA, your information is sent to the schools you specify, and those schools use the information to put together financial aid packages.

Grants don’t have to be repaid, but federal student loans might have to be. Federal student loans can be unsubsidized or subsidized. If you qualify for subsidized federal student loans, the government covers your interest while you’re in school. If you have unsubsidized loans, that interest can accrue while you’re in school and then be added to your loan balance.

Additionally, if you qualify for work-study, you might have to get a job. However, you’ll be guaranteed up to a set amount of pay for the work you do, which can help you with school-related living expenses.

State and school financial aid 

As you consider financial aid vs. student loans, you also need to look at other sources of financial aid, which include state and school sources.

Many states have their own programs that offer grants and scholarships. Additionally, some schools offer scholarships. Check with your state to see whether there are need-based financial aid programs that can supplement federal aid and help you pay your costs related to college.

Grants and scholarships don’t have to be repaid, so they are preferable to student loans, including federal student loans.

When you receive a financial aid package from a school, you’ll receive a list of available financial aid. It will include your grants and scholarships as well as federal student loans. It’s important to pay attention because federal student loans need to be paid back in many cases.

That confuses many people, and for good reason. You might assume that all financial aid doesn’t have to be repaid, but you might need to repay federal student loans, even though they’re often included in your financial aid package.

Private student loans

As you evaluate financial aid vs. student loans, you also need to consider private loans, especially if your financial aid package (including federal student loans) doesn’t cover all your costs.

Private student loans have to be repaid and aren’t eligible for most federal loan forgiveness programs. A main difference between federal student loans and private student loans is that federal loans have the potential for forgiveness. 

One reason federal student loans are considered part of a financial aid package is that they come with additional benefits that might not be available with private loans. Federal loans can potentially be forgiven through programs such as Public Service Loan Forgiveness and Teacher Loan Forgiveness as well as income-driven repayment. 

Private student loans also have different criteria. Direct federal student loans don’t have income or credit requirements, while private student loans do.

On the other hand, though, private student loans can sometimes offer lower interest rates and other benefits for students (or their parents) who have high credit scores and adequate incomes. Balancing private student loans with federal student aid is one way to make sure your costs are covered. Juno can help you find deals on private student loans and reduce your overall cost.

Other ways to pay for school

While you consider financial aid vs. student loans, it’s a good idea to look into other strategies to help pay for school. Additionally, there are programs that can help reduce the overall cost of school or ease the financial burden. 

Such programs and resources include the following:

  • Community scholarships: Some community organizations and service clubs offer scholarships that aren’t necessarily part of financial aid. These scholarships don’t usually have to be paid back and might include merit as part of the selection criteria.
  • Tax benefits: Tax credits such as the American opportunity credit and lifetime learning credit can help reduce the overall financial burden of attending college. They don’t directly go toward paying for school but can help you manage your money in other areas.
  • Employer assistance: Some workplaces help cover tuition costs. If your employer offers tuition reimbursement, you could reduce your overall costs and need for student loans if you don’t have enough financial aid.
  • Tuition-free schools: Some programs and schools don’t charge tuition. Check to see what’s available and consider applying for programs that don’t charge tuition. You can also look for colleges that offer free schooling to those in need. Some prestigious schools cover expenses for those whose families make less than a certain amount.
  • Departmental help: Finally, depending on the college you attend, there might be school-related scholarships from different departments. You might qualify for a performance stipend if you are a member of the band or involved in theater. Stipends might also be available for honor society members and others.
  • Personal savings: Consider personal savings, including in tax-advantaged accounts such as 529s and Coverdells. With these accounts, it’s possible to plan ahead to pay for school. Be aware of how they can impact financial aid, however. 

Bottom line

Financial aid vs. student loans can be a confusing topic. However, both can help you cover your expenses and make sure you are able to pay for your education. Carefully consider different strategies to pay for college based on your individual financial needs and family situation.

Miranda Marquit

Written By

Miranda Marquit

Miranda has 10+ years of experience covering financial markets for various online and offline publications, including contributions to Marketwatch, NPR, Forbes, FOX Business, Yahoo Finance, and The Hill. She is the co-host of the Money Tree Investing podcast and she has a Master of Arts in Journalism from Syracuse University


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