Student Loans vs. Scholarships: What Is the Best Way To Pay for College?

Student loans and scholarships are both popular ways to pay for college, but they work very differently. Scholarships are essentially free money that you don't have to pay back, while student loans are borrowed funds that you'll need to repay with interest.

Since scholarships don't require repayment, they're often considered the better option for covering college costs. However, many students still rely on a mix of both. In 2024, scholarships covered 15% of college costs, while student loans accounted for 12%, according to Sallie Mae's How America Pays for College report.

This guide explains the key differences between scholarships and student loans and offers tips on how to make the most of each.

What is a student loan?

A student loan is borrowed money that helps pay for college expenses, including tuition, fees, room and board, and supplies. You can get student loans from the U.S. Department of Education or private lenders like banks, credit unions, and online lenders.

Unlike scholarships, student loans must be repaid with interest. Most loans don't require payments while you're in school and during the six-month grace period after you leave school. However, interest typically starts accruing as soon as the loan is disbursed. This can make your loans more expensive by the time you graduate, as the unpaid interest gets added to your principal loan balance.

See Also: 5 Things To Know About Student Loans Before You Borrow

It's worth noting that federal student loans usually come with more flexible repayment options and protections, such as income-driven repayment plans and loan forgiveness programs. In contrast, private student loans often require a credit check and tend to have higher interest rates.

Current private student loan rates

What is a scholarship?

A scholarship is money awarded to help pay for college that you don't have to pay back. It's often called “free aid” or “gift aid,” and can come from colleges, private organizations, nonprofits, or government programs.

Many people assume scholarships are only for top students, but that's not always true. According to Sallie Mae's How America Pays for College 2024 report, 52% of families mistakenly believe scholarships are only available to students with high grades or exceptional abilities. In reality, scholarships can be awarded based on a variety of factors, including academic merit, financial need, area of study, community involvement, or personal background.

Although scholarships are generally free money, you might have to repay the funds if you don't meet the requirements, such as maintaining a certain GPA or staying enrolled full-time. To avoid any surprises, read each scholarship's terms and conditions carefully.

How is a student loan different from a scholarship?

The main difference between student loans and scholarships is repayment. Student loans must be repaid with interest, while scholarships are awarded as free money that you don't have to pay back.

Another key difference is how you qualify for them. Scholarships are often awarded based on merit, financial need, or other specific criteria like community involvement, area of study, or personal background. In contrast, federal student loans are generally available to most students who fill out the Free Application for Federal Student Aid (FAFSA), regardless of credit history. Private student loans, however, require credit approval, which means your credit score, income, and other financial factors will determine your eligibility.

Scholarships can reduce the amount of debt you need to take on without worrying about repayment later. On the other hand, student loans generally need to be repaid six months after you leave school, along with any unpaid interest that accrues. These payments can last for 10 years or more, potentially affecting other financial goals like buying a home, saving for emergencies, or investing for the future.

Pros and cons of student loans

Student loans can make college more affordable by helping you cover expenses like tuition, fees, and living costs. Federal student loans are easy to access through the FAFSA and don't require a credit check, unlike private student loans. They also tend to have lower interest rates and more flexible repayment options than other types of loans.

However, student loans are still debt, which means you'll need to repay the amount you borrow, plus interest. This can affect your budget for years after graduation and limit your ability to save for other financial goals. Additionally, if you fall behind on payments, you could face serious financial consequences, including damage to your credit score and tax garnishment.

Pros and cons of scholarships

The biggest advantage of scholarships is that they're free money — you don't have to pay them back like you would with student loans. Scholarships can reduce your out-of-pocket costs for college, which means you may not need to borrow as much. They can also recognize your achievements, community involvement, or other unique qualities.

However, scholarships rarely cover the full cost of college, even if you receive multiple awards. They're usually meant to help reduce your expenses, not eliminate them. In some cases, receiving a scholarship could also reduce the amount of other financial aid you're eligible for.

“Many colleges consider outside scholarships as part of a student's financial aid package. If a student receives a large scholarship, the college may reduce need-based grants, work-study, or loans instead of lowering the [Student Aid Index],” says Shellee Howard, certified college consultant and founder of College Ready.

Scholarships are also competitive. The application process can be time-consuming and may require essays, letters of recommendation, or other materials. Additionally, not all scholarships are renewable, and if they are, you'll need to meet specific requirements to continue receiving the funds each year.

Student loans vs. scholarships: Which is better?

The best way to pay for college is to start with scholarships and grants since they provide funding that doesn't need to be repaid. Once you've maximized free aid, you can fill in any remaining gaps with other funding sources, like student loans.

“Your job, basically aside from getting accepted to schools, is to pay as little as possible,” says Kevin Ladd, chief operating officer at Scholarships.com. Ladd recommends that students start looking into scholarships “when you're a freshman or sophomore in high school, because you can start winning scholarships that early.”

After exploring scholarship options, fill out the FAFSA to access federal financial aid, including work-study, grants, and federal student loans. If needed, complete the CSS Profile for additional institutional aid.

“Use loans wisely. If scholarships and grants don't cover all expenses, loans can help — but use them strategically,” adds Howard.

It's also smart to communicate directly with financial aid offices.

“Ask the financial aid office, ‘Hey, if I get scholarships, are you going to count that against my aid?’” advises Ladd. This can help you understand how scholarships might impact other forms of financial aid.