Grants vs. Loans: Which Do You Need?

College is a wonderful way to invest in your future. As you're planning for which classes you'll need and where you'll live, you'll also need to plan how you'll pay for college.

Most students reach this goal through a combination of savings, family contributions, and financial aid, which includes scholarships, grants, and loans. To qualify for financial aid, including grants and student loans, you'll need to complete the Free Application for Federal Student Aid (FAFSA).

The FAFSA Helps You Qualify for Grants and Federal Loans

The FAFSA is the first step to qualify for grants and federal student loans, as well as scholarships and work-study programs. The FAFSA opens on October 1 - for the following school year. The process is free, but you need to complete the FAFSA every year you plan to be in school to qualify for financial aid. The FAFSA.gov website has a list of documents you'll need to complete the form, as well as answers to frequently asked questions.

States and schools also use information from the FAFSA to distribute financial aid. Some states, including North Carolina, distribute state funds on a first-come, first-served basis. So, you'll want to complete the FAFSA as soon as possible.

After you've completed the FAFSA, your school will send you a financial aid award letter. Most schools send this out in the spring for the following academic year. But, be sure to check with your school's financial aid office to find out when they release aid offers. The letter will indicate your eligibility and the amount of federal and state scholarships, work-study, grants, and loans you may receive.

A common question we hear from parents and students is, "what's the difference between a grant and a student loan?" So, let's look at how they both work and how they fit into your overall strategy to pay for college. First, let's start with grants.

What is a Grant?

Grants are financial aid that doesn't have to be repaid. Yes, you heard us correctly. Grants are free money to pay for college! Grants are usually based on financial need rather than on merit requirements, such as your grade point average.

Grants can come from federal and state governments, as well as individual schools, so you may be eligible for more than one type of grant to pay for college expenses. The most common grant for undergraduate students is the Federal Pell Grant.

You'll find out if you're eligible to receive a Pell Grant, and other financial aid, when you complete the FAFSA. Now that we've covered grants, let's discuss student loans.

What is a Student Loan?

The biggest difference between grants and student loans is that you'll have to repay student loans. Loans can be borrowed from the federal government, private banks and lenders, nonprofit organizations, and other institutions. About 50 percent of families utilize student loans to pay for college. Here we'll share more information about low-interest student loans from the federal government, known as Direct Loans.

While you will hear people use the generic term "student loan" to refer to any education loan, it's important to know that there are student loans (borrowed by the student) and parent loans (borrowed by the parent for the benefit of the student) available to help cover the cost of college.

The U.S. Department of Education offers students low-interest federal Direct Loans (sometimes referred to as Stafford Loans) to pay for college. So, this is the first place that students should start if you need a loan for school. Just like grants, you'll find out whether you're eligible for federal student loans when you complete the FAFSA. Low-interest federal student loans include subsidized and unsubsidized loans.

A Direct Subsidized Loan is based on your financial need. While you're enrolled in school at least half-time and during the grace period after you leave school, you don't have to make payments on the loan because the federal government pays your interest for you (that's the subsidy).

In addition to Direct Subsidized Loans, the Department of Education also offers Direct Unsubsidized Loans to both students and parents. The student loans are called Direct Loans, and the parent loans are called Direct PLUS Loans. A Direct Unsubsidized Loan is not based on financial need. While you don't have to make payments on the loan when you're attending school at least half-time, you are responsible for the interest on the loan. You can choose to defer the interest until after you leave school, or you can choose to pay the interest, so it's not added to the principal loan amount.

Once a student has exhausted the availability of Direct Loans, students and parents should compare rates and terms of Direct Unsubsidized Student and Parent PLUS Loans to determine the best option if you will need additional funds to pay for school.

Will You Need Additional Funding?

If your other financial aid and family savings are not enough to cover your college expenses, students and parents may consider an alternative, or private, student loan. However, not all alternative loans are created equal.

First, alternative loans are offered by for-profit and nonprofit lenders, which could signal that some lenders are focused on the bottom line, while nonprofit lenders are focused on students. That's one thing to consider when choosing the right alternative loan for you. You'll also want to compare interest rates, fees, terms, and repayment options.

Direct PLUS and Parent PLUS Loans are federal loans, but they don't carry the same low interest rates as Direct loans. PLUS Loans also charge a loan fee, which in 2020 was 4.236 percent of the loan amount. For example, if you borrow $5,000, 4.236 percent, or about $211, is taken from the loan before it's disbursed to you. However, you'll still have to repay the $5,000 plus interest.

In North Carolina, College Foundation, Inc. (CFI), a nonprofit corporation serving North Carolina students and families since 1955, offers NC Student Assist and NC Parent Assist Loans. Students and parents who are North Carolina residents, and families who live out of state but have a student attending an eligible North Carolina college, can apply for the NC Assist Loan. The loans do not charge fees and offer competitive fixed interest rates.

NC Assist Loan Program Focuses On Students

Grants and loans are not guaranteed year-to-year. If your family's financial situation changes significantly, it could affect the amount of federal financial aid you're offered. So, while you want to take advantage of all the financial aid you're offered after completing the FAFSA, it's not always enough to cover the cost of college.

If you would like more information about working with a nonprofit loan program that supports higher education in North Carolina, click here to find out more about the NC Assist Loan program.