Textbooks alone can cost hundreds of dollars per semester in the United States.
Education in the United States is costly, and most people do not have enough funds readily available to cover the cost of a post-secondary degree on their own. The majority of individuals seek one or more forms of financial aid and student loans in order to cover some or all of their education expenses. Major differences exist between these funding sources.
Repayment
Often, you need not repay financial aid. This is because financial aid usually is in the form of grants and scholarships. By contrast, you have to pay back a school loan, plus interest. Because financial aid typically doesn't require repayment and therefore doesn't tie up your budget and credit later on, it usually is preferable to taking out school loans.
Grantor
Financial aid comes from individuals and organizations who want to invest in education. The government is one of the largest providers of financial aid, but private agencies such as businesses also give educational monies because of the tax credits and deductions available to those who set up charitable funds. Individuals usually give based on specific educational areas or philosophies. For example, an established musician may fund a scholarship for young musicians to buy new instruments. In contrast, school loans are given by creditors such as banks who don't necessarily have education as a priority. Although you have to explain how you will use the borrowed funds, creditors are more concerned with your ability to repay the loan than they are your educational philosophies or goals.
Eligibility
Financial aid usually is dependent on eligibility requirements--one of the most common eligibility requirements is an income level below a specified amount, which varies by the institution providing the aid. Other requirements may include that the applicant be from a specific geographical region, be a member of a certain ethnic group such as Native American or African American or have a specific grade point average. Financial aid requirements thus can be more restrictive than school loan requirements. With school loans, you typically qualify so long as you can show your creditor you can repay the funds and your credit is good.
Restrictions
School loans do not always indicate specific applications for the monies. They may cover your costs under the blanket term "education loan." Conversely, financial aid usually has specific applications. For instance, a scholarship may cover only the cost of your books, or it may require that monies be filtered through your school's financial aid office to ensure appropriate use of the funds. Another difference is that providers usually specify the amount of financial aid they'll give, such as $500 a semester. With a loan, you determine the amount you need and your ability to get that amount depends on whether you convince the lender you can repay the requested amount based on your income and credit.
Renewal
Often, you can renew financial aid. For example, you might get a scholarship that pays $1,000 a year for up to four years. To continue receiving the funds, you simply notify the provider and financial aid office and provide evidence you are still receiving your education. You cannot renew an education loan, although you have the option of refinancing the loan for better interest rates or lower monthly payments. Additionally, if you successfully pay down one education loan, this may help your credit score and the odds of getting additional education loans in the future.
Considerations
Both financial aid and school loans have tax benefits, as you can take education deductions and credits based on the funding you receive. Generally, you should seek school loans only if financial aid is not sufficient to cover your expenses, since loans increase debt. Lastly, if you intend to apply for aid or a loan with more than one agency, you typically will have to submit documentation of the funding you already have, since agencies generally determine your award or loan package based on what percentage of your funds are available for education. Providers usually give priority to people who demonstrate the greatest need, although creditors also are concerned with your ability to repay.
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