Understanding the Difference Between School Loans and Grants

By Trevor Onions , last updated October 31, 2011

Financial aid is the cornerstone of making it through a college education, and understanding the difference between school loans and grants is important. Without knowing the fine details, you may miss out on free money and unintentionally broaden your debt. At the same time, realizing what your chances are of getting each type of aid is critical for planning. Here's what you really need to know about both student loans and grants.

About School Loans

Student loans are the number one source of financing an education at the present time. They come from both the government and private sector, and often require a co-signer in cases where the student has an insufficient credit history of their own. Student loans, when used wisely, can be a necessary driver of financing for your education. Yet, approaching them cautiously and sparingly is the smartest policy.

With few exceptions, Federally backed loans like Ford, Parent Plus, and Stafford Direct loans are superior to seeking private lenders. The interest rate provided on these types of loans is much lower than you'll find with private banks. The government has more generous terms than private lenders too, allowing students and their families helpful incentives for locking in low interest or writing off debt, in return for working in certain professions or meeting repayment standards.

Private loans from large entities like Sallie Mae and Wells Fargo can cripple a new graduate if too much debt is taken on. Higher interest arrives with these loans, as well as unfavorable consumer protections. This debt can never be discharged in bankruptcy, meaning it should be minimized as much as possible, since it's the most dangerous type of debt. Tread carefully with private school loans, and only take them when it's absolutely necessary.

Understanding Education Grants

Like student loans, grants come from private and government sources. However, all grants are valuable types of free money, giving you a significant boost in the battle to pay for your degree. Federal grants are the most effortless to acquire, but they are difficult to qualify for. Filling out a FAFSA form is the first step, and Pell Grants for lower income students are the most common types of awards given out by the government.

Many grants come in the form of scholarships from private businesses and organizations dedicated to promoting their viewpoint or academic excellence. These groups may give preferential treatment to students from a certain economic, ethnic, or geographic background. Other scholarship providers give out money to the most promising candidates for careers of the future. In short, there are grants available for everyone. Simply applying is enough to get small scholarships from some groups, while others require students to compete with essays and presentations for a chance at receiving a complete education paid upfront.

Naturally, in the quest to secure money for your education, you should seek out grants first, and then loans. By maximizing free money versus debt incurred for your education, you'll graduate with new skills and minimal financial baggage. This can place you far ahead of your peers in the financial field, and open up new opportunities for gaining experience beyond college.

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