How Is A Student Loan Different From A Scholarship?

Deciding to pursue higher education and further study is an exciting goal and an amazing achievement- but one that can come with a hefty financial price tag.

Many students find themselves facing large bills in exchange for further study, and getting your head around the types of financial aid that may be available can be confusing at times, especially if you are the first in your family to go to college, or to have to navigate the system.

How Is A Student Loan Different From A Scholarship

As a general rule, there are three primary forms of financial aid that are available to students: student loans, scholarships and college grants.

Each of these will have different requirements, restrictions and conditions, with scholarships typically being awarded for academic excellence or achievements in a certain area – and therefore more limited – and student loans being an option for the majority of students.

The primary difference between the two is that student loans need to be paid back to the lender, while this does not apply to scholarships.

Student Loans

The most common type of financial aid is a student loan.

As the name suggests, this is a specific type of loan, taken out from an external, specialist provider, that a student is eligible to take out, and use the money to pay for educational expenses such as books, rent and lodging fees, living expenses and tuition for the course.

Once you have completed the course, you will then be required to pay the amount of money you borrowed back to the loan provider, according to the terms of your contract.

Most students will be eligible to apply for student loans, but the exact type, terms and amounts may differ depending on your financial background, and the way in which you meet specific criteria.

Those who are able to demonstrate financial circumstances which would prevent them from studying may be deemed to be in financial need, and this means that they will likely be eligible for federal student loans.

Federal student loans come in two main types: subsidized loans and unsubsidized loans. The key difference between these two is the way in which the interest accumulates and builds up throughout the lifespan of the loan.

Unsubsidized loans will be an option available to both undergraduate and graduate students, and will usually be allocated regardless of the financial situation of the student.

Student Loans

On these types of loans, the interest owed will start to accrue as soon as the loan is released to the student, meaning that you will be accumulating interest all throughout your time at school – this can mean that you end up paying considerably more interest.

Students will have around six months from the date of graduation to starting to pay back the loan – but by this point you will already have been accumulating interest from the day that the loan was issued to you.

If you have to take an unsubsidized loan, try to budget to make interest payments while you are still in school – this can save you a lot of money in the long run.

A better option for those who have it available is a subsidized loan, but the eligibility criteria for this are a little tougher – you will need to be an undergraduate student, and allocations are based on financial needs.

These types of loan do not start to accumulate interest until after you have started your repayments – the government will cover your interest payments while you are studying, and for the first six months following your graduation.

They will also cover a short period of deferment for any reason.

Those students who are not deemed to be in financial need may have to turn to private lenders to obtain a private student loan, and these will usually require a good credit history before you can secure funds.

No matter whether your provider is a private lender or the federal government, the body behind the money will liaise with the financial department of your chosen school, and pay the fees directly to the institution – you will not typically see this money.

Depending on your school or college, the financial department may then distribute any leftover money from your loan to help you pay for other expenses while you study – this depends largely on how expensive your school is, and how high the fees are.


While student loans are generally available to all students in one form or another, scholarships are a different story.

These are specific prizes, allocated by a designated scholarship provider, that you can win and be awarded if you meet the specific criteria and requirements.

As a rule, scholarships are awarded to students who excel in a particular area, such as sports, leadership or academics, or those who are able to demonstrate particular values and attributes that are valued by the scholarship provider.

Academic scholarships tend to be amongst the most common and, as the name suggests, you will need to demonstrate excellent academic prowess in order to be eligible – the scholarship provider will typically look at your academic performance all through high school before deciding whether to award you funds.


Sports and athletic scholarships are also available for elite performers, as are scholarships based on dance or drama prowess.

Depending on the provider, you may also be able to apply for scholarships based on a particular need, for example, if you are part of a group deemed to be ethically or socially under-represented, or one of only a few people doing a subject deemed “unusual” – women in engineering based subjects is a common example.

In some cases, scholarships may also be available for outstanding community service, or from an employer where the qualification is a work-based role.

Scholarship money comes directly from the scholarship provider, who will work with your school to pay both accommodation and tuition fees.

There is one key difference to student loans, however: you will never have to pay any money awarded to you as part of a scholarship back to the provider.

If you are fortunate enough to win a full scholarship, this can allow you to leave college free from debt.


It is also worth taking a moment here to mention grants – these operate in a similar way to scholarships, but are often considered in a separate category.

Grants can offer financial assistance to students, and may be available from the federal or state government, the university or school, a charity, or another private source.

As with scholarships, certain eligibility criteria must be met – this will depend on the nature of the grant – and, as with scholarships, students will not be required to pay the money back, providing that they retain the eligibility criteria.

This means that if you drop out of school, for example, or withdraw from a program of study that came with a specific grant, such as the Teacher Education Assistance for College and Higher Education (TEACH) grant, then you will likely be required to pay the money back to the provider.

Grants differ slightly from scholarships in that they are usually allocated and awarded based on the academic need of the student, rather than based on skill, excelling in a specific subject, or academic merit.

They tend to be awarded to students from lower socioeconomic backgrounds, or who are deemed to be in financial need, and act as a middle ground between loans and scholarships.

Can I Take Out A Loan If I Am Awarded A Scholarship?

In some cases, you may be offered a partial scholarship, but find that this is not quite enough to cover your tuition or accommodation fees, and this can make things a little more complicated.

If you are in receipt of a scholarship, you will still be eligible to apply for federal and private student loans, but the financial assistance provided by the scholarship will be taken into account – and this can impact your eligibility for a loan.

When colleges and schools are allocated financial aid, they will work to determine your “financial need” – this determines how much, if any, aid you are entitled to receive.

Student Grants

Your financial need is determined by calculating your total Cost of Attendance (COA) – in other words, how much it will cost you to attend school – and your Expected Family Contribution (EFC).

A scholarship will be marked down as reducing your COA, and this means that you may find yourself ineligible for financial aid, or only eligible for a lower amount.

You should also know the difference between “first dollar” scholarships, designed to be allocated without considering any other forms of financial aid, and “last dollar” scholarships, which are designed to cover any gaps that remain once you have applied for all other eligible financial aid.

This means that you may have to do your sums if you find yourself offered several means of support – some avenues could be more financially beneficial for you than others.

Final Thoughts

There are no two ways around it: college is expensive, and getting your head around the variety of options to fund your course can be confusing.

In the simplest terms, remember that student loans and scholarships are both types of financial aid that can be used to pay accommodation and tuition fees, books and living expenses.

Student loans are available to most students, though eligibility criteria apply, and scholarships are typically awarded for excellence in a specific field.

Grants are a third category, usually awarded to those in financial hardship.

In order to determine the best way to fund your education, you need to have a good understanding of the types of financial aid available, as well as do the math to work out the best method to help you cover your bases, and pay your expenses with minimal stress.

Brad Johnson