Financial Aid vs Student Loans: Similarities and Differences
Figuring out how to pay for school can be stressful, so it’s important to compare financial aid vs student loans so that you can reduce your financial burden as much as possible and find out what’s right for you.
When college financial aid isn’t enough, people use federal or private student loans to help cover costs. Private student loans can also close gaps between what you qualify for and how much you need. We’ll compare student loans vs financial aid and explore some features that can help you determine what makes the most sense for your financial situation.
Key Points
• Financial aid includes scholarships, grants, work-study, and federal student loans to help cover education costs.
• Student loans must be repaid with interest, while scholarships and grants typically do not require repayment.
• Federal student loans offer fixed rates and repayment options, while private loans vary by lender and credit history.
• Financial aid can be competitive and may not cover all expenses, requiring additional funding.
• Student loans provide financial support but increase post-graduation debt and potential financial strain.
What Is Financial Aid?
Financial aid is funding that is available to students to help make college or career school more affordable. College financial aid comes in several forms and helps students pay for higher education expenses, including tuition and fees, room and board, books and supplies, and transportation.
Here are several types of financial aid available to students:
• Scholarships: A scholarship is a form of financial aid that’s awarded to students to help pay for college. Scholarships are typically awarded based on academic or athletic achievement, community involvement, job experience, field of study, financial need, and more.
• Grants: A grant is a form of financial aid that doesn’t have to be repaid and is generally based on financial need.
• Federal Work-Study programs: The Federal Work-Study Program offers funds for part-time employment to help eligible college students in financial need.
• Federal student loans: Federal student loans are borrowed money from the federal government or private lenders to help pay for college.
Financial aid can come from federal, state, school, and private sources. Federal Student Aid, a part of the U.S. Department of Education, is the largest provider of student financial aid in the U.S. Federal aid is distributed to 13 million students each year, totaling $120 billion.
What Are Student Loans?
Student loans are money borrowed from the government or a private lender to help pay for school with the expectation that you will pay it back. Like most other types of loans, the amount borrowed will accrue interest over time. Student loans can be used on school-related expenses including tuition, room and board, and other school supplies.
Loans are different from grants or scholarships and it’s essential that you understand the differences between financial aid vs student loans. If you receive a grant or a scholarship, you typically don’t have to pay that money back. Student loans are also different from work-study programs, where students in financial need to work part-time jobs to earn money to help pay for school.
It’s common for college students to take out student loans to finance their education, but you should first compare federal vs private student loans. Federal student loans offer some borrower benefits that make them preferable to private student loans.
Federal Student Loans
Federal student loans are loans that are backed by the U.S. government. Terms and conditions of the loan are set by the federal government and include several benefits, such as fixed interest rates and income-driven repayment plans.
To qualify, students must fill out the Free Application for Federal Student Aid (FAFSA®) every year that they want to receive federal student loans. The FAFSA also allows students to apply for federal aid including scholarships, grants, and work-study. Colleges may also use the information provided on the FAFSA to determine school-specific aid awards.
There are four types of federal student loans available:
• Direct Subsidized Loans: Direct Subsidized Loans are student loans for undergrads in financial need to help pay for expenses related to higher education. The government covers the accruing interest on this type of loan while the borrower is enrolled in school at least half-time and during the loan’s six month grace period after graduation.
• Direct Unsubsidized Loans: Direct Unsubsidized Loans are made to eligible undergraduate, graduate, and professional students. Eligibility is not based on financial need. Borrowers are responsible for all accrued interest on this type of loan.
• Direct PLUS Loans: Direct PLUS Loans are made to graduate or professional students, known as the Grad PLUS Loan, or parents of dependent undergraduate students, known as the Parent PLUS Loan. These loans are meant to help pay for education expenses not covered by other financial aid.
• Direct Consolidation Loans: Direct Consolidation Loans allow students to combine all eligible federal student loans into a single loan.
Private Student Loans
Private student loans can also be used to help pay for college. Private student loans are offered by banks, credit unions, and online lenders.
While federal student loans are generally the first option potential student borrowers pursue, private student loans may be an option for those that don’t receive enough federal aid to cover the cost of attendance. Unlike federal student loans, which have terms and interest rates set by the federal government, private lenders set their own conditions that vary from lender to lender.
Private student loans are also credit-based. The lender will review an applicant’s credit history, income and debt, and whether they’re enrolled in a qualified educational program. Applicants who may lack credit history, or have a less than glowing credit score, may consider applying with a cosigner to improve their chances of approval.
Keep in mind that private student loans don’t come with the same borrower protections as federal student loans, and are generally only used as a last resort option.
Financial Aid vs Student Loans Compared
When comparing financial aid vs student loans, you need to be aware of the similarities and differences. Here are some key comparisons.
Similarities | Differences |
---|---|
They can both be used to help fund education-related expenses. | Grants and scholarships, a type of financial aid, typically do not need to be repaid. Student loans must be repaid within a given loan term, plus interest. |
FAFSA must be filled out for financial aid and federal student loans. | Financial aid and student loans may be paid out differently. |
Financial aid and student loans have certain eligibility requirements. | Some financial aid, like scholarships, may be awarded based on merit. Federal student loans can be both need and non-need based. Lending criteria on private student loans is determined by the lender. |
Similarities
Financial aid and student loans are both used to help fund education-related expenses, like tuition, room and board, books and classroom supplies, and transportation.
Financial aid and student loans backed by the federal government also require students to fill out FAFSA for each year that they want to receive federal student loans or federal financial aid. Financial aid and student loans also have some sort of eligibility requirements, whether that be based on financial need, merit, or creditworthiness.
Differences
The biggest difference between financial aid and student loans is whether or not you need to pay back the money you are given to help pay for college. Certain types of financial aid — such as grants and scholarships — do not need to be repaid. Student loans, on the other hand, do need to be repaid, plus interest.
There may also be differences in how financial aid and student loans are paid out to the student. Private student loans are usually paid in one lump sum at the start of each school year or semester. Federal student loans are typically applied to tuition and fees, with any remainder being disbursed to you. Government grants and loans are generally split into at least two disbursements. If you have a work-study job, you’ll be paid at least once a month.
Recommended: Gift Aid vs Self Help Aid For College
Pros and Cons of Financial Aid
Pros of Financial Aid
• Financial aid includes grants and scholarships, which typically do not need to be repaid.
• Potential to decrease future debt by minimizing the amount you have to borrow.
• Opens up new opportunities for many students to attend a better school than they could without financial assistance.
• Allows students to focus on their education instead of worrying about paying tuition.
Cons of Financial Aid
• Most financial aid does not cover all school-related costs.
• Scholarships, grants, and work-study programs can be highly competitive.
• You may have to maintain certain standards to meet eligibility requirements during each semester.
• There’s less flexibility on how you can spend funds.
Pros and Cons of Student Loans
Pros of Student Loans
• Student loans offer financial support for those who would otherwise be unable to attend college.
• You don’t need any credit history for federal student loans and you can use a creditworthy cosigner for private student loans.
• Student loans can be used for things beyond tuition, room and board, and books.
• Paying off student loans may help you build credit.
Cons of Student Loans
• You start off with debt after graduating from college.
• Student loans can be expensive.
• Defaulting on student loans can negatively impact your credit score.
• If you borrowed a private student loan, the interest rate may be variable.
The Takeaway
Understanding the similarities and differences between financial aid and student loans is key to making informed decisions about paying for college. While both options help cover education costs, financial aid often includes grants and scholarships that don’t need to be repaid, whereas student loans must be paid back with interest.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
FAQ
Does FAFSA loan or grant money?
FAFSA is an application that you fill out in order to determine your eligibility for receiving a federal loan or federal student aid such as grants and scholarships. While a federal student loan is borrowed money that must be repaid after graduation, funds received through grants, scholarships, and work-study programs do not need to be repaid.
Can you get financial aid and student loans at the same time?
Yes. If you apply for financial aid at your school, you may be offered loans as part of your school’s financial aid offer to help cover the remaining costs.
Do scholarships count as financial aid?
Yes, scholarships are a type of financial aid that is considered gift aid and typically do not have to be repaid.
Photo credit: iStock/Altayb
SoFi Private Student Loans
Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
SOISL-Q225-028
Read more