The cost of college seems to rise exponentially, especially after austerity policies caused a divestment in higher education in states across the country following the Recession.
If you want to get a degree, you’re going to have to pay generously for it.
There is good news, though: There’s more than one way to pay for college. You don’t necessarily have to take out student loans. Or if you do, you don’t have to use them to finance 100% of your tuition.
One of the alternatives to student loans is grants.
Today we’ll take a deep dive into both college financing options, providing you with the information you need to make the best decisions under your own, personal circumstances.
What Is The Difference Between a Loan and a Grant?
At its very core, the difference between grants and loans is very simple:
Loans you must repay with interest, while grants are more like a gift you never have to repay. Financially, grants are obviously preferable to student loans.
However, there are circumstances that could keep grants out of your reach, forcing you to look at other funding options like scholarships, dropping out of school or taking out loans you’ll likely be repaying over the course of your career.
How Grants Work
Grants are gifts. They may be issued by a nonprofit or other values-based organization, but today we’re just going to focus on grants issued by the federal government for the purposes of pursuing higher education.
How Do You Qualify For a Grant?
Grants from the federal government are issued based on financial need. To calculate your financial need, the Department of Education (ED) collects your tax and other relevant financial information via the Free Application for Federal Student Aid (FAFSA).
In the past, this form used to be cumbersome to fill out. But with the advent of digitized tax returns, it’s something most students and families can complete quickly and easily online.
After it runs your financials through a complicated formula, it will determine your family’s expected family contribution (EFC). The process is not immediate.
If your EFC is low, your award letter will likely include at least one of the following grants:
- Pell Grant (most common)
- Federal Supplemental Educational Opportunity Grant (FSEOG)
- TEACH Grant
- Iraq & Afghanistan Service Grant
Repaying Grants
We often hear, “do you have to pay back grants?“, the simple answer is, grants do not have to be repaid! They’re free money for college. That is, they won’t have to be repaid as long as you keep the terms and conditions of the grant.
For most grants, that means that you won’t drop out mid-semester and won’t repeatedly perform poorly in your academics.
However, other grants have even more requirements. For example, the TEACH grant requires that teachers provide four years of service in an underserved area or field during the first eight years following graduation.
If you fail to complete this service requirement, you’ll have to pay back your grant — with interest.
But for students who keep their commitments during their studies and after graduation, this is free money you’ll never have to pay back.
Pros and Cons of Using Grants to Pay for College
If you qualify for grants, using them to pay for college is a smart move. Not everyone will qualify for grants, though, so this form of financing does come with its own set of cons in the realm of accessibility.
Pros
- You won’t have to repay your grants as long as you keep the terms and conditions.
- While you do have to maintain a certain GPA to continue receiving grants, they are not a GPA competition in the same way that scholarships are. The fact that you don’t have straight A’s won’t put you at any competitive advantage.
- Many grants are refundable. If you attend a school with low tuition, such as a community college, federal grants could cover your tuition and then some, earning you a refund check to put in your pocket.
Cons
- If you have a high EFC, you’re unlikely to qualify for federal grants. This is particularly common among traditional students who still must report their guardians’ income, even if they provide no financial support.
- If you do not keep the terms and conditions of your grant, you will have to repay it. Sometimes with interest.
How Student Loans Work
When you take out a student loan this is how it works, you’re borrowing money for your education and agreeing to pay it back with interest.
Student loans can rarely be discharged in bankruptcy — though it is possible in very select circumstances — meaning that this is a debt likely to follow you around for the rest of your life.
In a country where college prices have skyrocketed while wages have stagnated, you need to be exceedingly careful to determine if your return on investment will be worth it.
There are two different types of student loans: Federal and Private.
For most borrowers, federal loans are preferable so that’s what we’ll look at today. It is important to note the existence of private student loans, though, and that the way they work can be vastly different than the federal loans discussed below.
How Do You Qualify for a Student Loan?
There are currently three different types of student loans issued by the federal government: Direct Subsidized, Direct Unsubsidized, and PLUS.
Direct Subsidized Loans are offered based on your EFC. That means your eligibility will be determined like it was with grants after you fill out the FAFSA.
You must fill out the FAFSA in order to qualify for Direct Unsubsidized Loans and PLUS Loans, too, but your eligibility will not necessarily be determined by your EFC.
The type of federal loan with the highest interest rate is the Direct PLUS Loan. These loans are only issued to parents and graduate students.
You must fill out a FAFSA to qualify for this loan, but for this particular loan, your credit will be checked. If you don’t have a good credit history, you can still apply for a PLUS Loan with a cosigner or if you explain to ED extenuating circumstances that caused that negative information to show up on your credit report.
Repaying Student Loans
Repaying student loans is a given. You’re borrowing money that you’re going to have to pay back, and you’re going to have to pay it back with interest. How much interest depends on the type of loan and when you took it out.
Direct Subsidized Loans come with the lowest interest rate. There’s another bonus with these loans: While you’re in school, your payments will be deferred, which means you won’t have to make payments until six months after graduation — assuming you graduate, that is.
Because they are subsidized, the federal government will pay the interest on your loans while you’re in school, too, so your balance doesn’t grow between now and your bachelor’s.
Direct Unsubsidized Loans currently offer the next best interest rate. While your principal payments will still be deferred while you’re in school, you will have to make interest payments. If you do not, the interest will be tacked onto your principal, and your balance will grow while you’re hitting the books.
Federal student loans come with a myriad of advantaged repayment plans, allowing many to repay based on their income and have portions of their balance forgiven. These repayment plans are one of the advantages of using federal over private student loans.
Pros and Cons of Using Loans to Pay For College
Loans are the last resort for college funding, but those with college degrees do still outearn those without.
There is a strong chance that taking out loans after you’ve exhausted all other options will allow you greater economic power as long as you’re repaying them responsibly.
Pros
- Can give access to college funding for those who do not qualify for grants or scholarships.
- Federal loans are superior to private loans, even though scholarships and grants are preferable.
Cons
- Will have to repay with interest.
- Difficult to discharge in bankruptcy.
- Entirely possible to borrow more than you will be able to repay, especially if you don’t do thorough and diligent research on expected ROI.
Grants vs Loans: Which Wins?
Grants are a superior option to loans. Hands down. You won’t have to repay them as long as you keep the terms and conditions. Loans, on the other hand, can be expensive and prohibit you from pursuing your financial goals in adulthood as they burden your budget.
It’s not an either/or sentence, though. If you or your family’s income prevents you from getting grants, apply for scholarships. Scholarships are often, though not always, merit-based and judged independently of the student’s family income situation.
If you fail to obtain scholarships, you can work your way through school, pick the institution you can afford rather than the one you dreamed of, and cut any excessive spending habits you may be perpetuating.
Not everyone can eliminate student loans from the equation, but everyone can work to minimize the amount they have to borrow.
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