College funding options: Financial aid vs. student loans

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Paying for college is complicated. Today’s students often draw upon multiple sources of funding, from scholarships to loans to federal financial aid. Since the funding options you choose now can impact your financial future for years to come, it’s important to know what you’re getting.

The term “financial aid” can be confusing for many parents and students. It’s often misused as a blanket term for all sources of college funding, including student loans. There’s a big difference between a federal grant and, for example, a private student loan.

By this time next year, you’ll be well-versed in the differences between college funding options. For now, here’s a quick primer to get you started.


What is financial aid?

When high school guidance counselors talk about financial aid, they’re usually referring to Federal Student Aid, a federal program that provides more than $150 billion in financial aid every year. It offers three types of assistance:

  1. Grants, or money that doesn’t have to be repaid.
  2. Work-study, so students can earn money to help pay for school.
  3. Federal student loans, which must be repaid with interest.

Federal financial aid is need-based, which means it’s awarded based on students’ financial need. To qualify, students must fill out a Free Application for Federal Student Aid (FAFSA). While this year’s seniors have until June 30 to file their FAFSA for the 2021-2022 school year, they have a chance at getting more money if they submit it earlier—ideally by Oct. 1, 2020.

The FAFSA not only opens the door to federal funding, but many colleges also use it to award scholarship money. While school-awarded scholarships don’t count as federal assistance, some people still consider them part of a student’s overall financial aid package.


What makes student loans different?

There are two main types of student loans: federal loans and private loans. Federal student loans are issued by the government, with terms and conditions set by law, and they offer special benefits such as fixed interest rates and income-based repayment plans. Private loans are issued by banks and credit unions, with terms and conditions set by the lender, and they’re generally more expensive than federal loans.

Students who qualify for federal student loans as part of their financial aid package typically don’t need to make payments until they graduate and can choose from several repayment options. Some students may even get their loans subsidized, which means the government pays the interest while they’re in school.

Private student loans, on the other hand, aren’t subsidized, which means the borrower is responsible for all of the interest—even while they’re in school. However, some lenders will allow students to defer payment until after graduation. Although they aren’t as flexible as federal loans, private student loans can help fill the gap when a student’s financial aid package doesn’t quite cover the full cost of a college education.

If you do seek out a private loan to help pay for college, you’ll often get a better deal if you borrow from a credit union instead of a major bank. That’s because credit unions are often able to offer lower interest rates and more flexible terms. For example, OCCU issues private student loans with low variable annual percentage rates (APR). Plus, you don’t need to make payments while you’re in school—although your balance will still accrue interest—and you can take up to ten years to pay it back once you’re no longer a student.

If you’re looking for more ways to pay for college, our Private Student Loans can help. Find out more about how we can help fill the gap in financial aid.