Loans vs. Grants - All You Need to Know
You’ll hear the terms loans and grants at some point in your life. You might even receive it without knowing! People as young as 18 qualify for loans and grants, the most popular being college.
Attending college will cost you a lot of money. Schools have crazy sticker prices for tuition and dorm. The average cost of attendance for a student living on campus at a public 4-year in-state institution is $25,707 per year or $102,828 over 4 years. Out-of-state students pay $43,421 per year or $173,684 over 4 years. Private, nonprofit university students pay $54,501 per year or $218,004 over 4 years. These are very expensive and students at 18 are responsible to pay these all back at graduation! Imagine being $220,000 in debt after graduation!
When you search up a college’s cost you get the sticker price. The sticker price is the full price of the college you have to pay if you get no help or aid. That’s not the case for most students. Grants, loans, and scholarships help students make college more affordable.
Loans and grants are not just for college students. Grants can be awarded to small businesses, researchers, and nonprofits. Grants also award counties, states, cities, and law enforcement.
Loans are simpler. You borrow money and you pay it back with interest. Everyone uses loans: mortgage, car loans, student loans, personal, business, etc. You can borrow money for anything!
What is a grant?
Grants are funding (usually given by the government) to help support you or your company to reach your goals and incentives. You can also view a grant as a gift, so you keep all the money. Who pays back a gift? Actually, you pay back without even noticing it.
For example, Federal Pell Grant is awarded to students with low income. The Federal Pell Grant doesn’t have to be repaid and it is essentially an aid for students to help them get a college degree. The maximum Federal Pell Grant for 2022-2023 is $6,895. Federal Pell Grant is awarded by FAFSA and is funded by federal tax dollars paid by U.S. citizens.
In return, after 4 years of receiving the grant and finishing college, you’ll earn a job! With that job, you’ll have to pay taxes. Then they take a portion of your federal taxes and use it for more federal pell grants. Grants are investments for the government because it stimulates the economy and advances technology. Now you’ll be paying taxes for the rest of your life and they’ll profit from providing you with grants!
Small business grants are also available for all types of businesses! Grant money is usually provided when the government or private businesses want a sector to grow. Tech companies are at an advantage for grants and are heavily funded to grow the sector. To find these grants you have to research a lot! There might be specific grants like “60 and older woman online business with less than 20 employees.” If you do your research you’ll be able to find grants!
Links to find business grants
www.sbir.gov (Small Business Innovation Research)
www.sba.gov (U.S. Small Business Administration)
www.grants.gov (Government Grants)
www.ambergrantsforwomen.com (Amber Grant - Grants for Women)
www.veterans.com (grants for veterans)
Check out your state’s official website for a grant program
What is a loan?
A loan is a financial instrument in which one party borrows money from another, such as a mortgage, credit card debt, or personal line of credit. In most cases, you will be charged interest on your loan and you’ll have to pay it over a period of time.
Most common loans
Credit Card Loans
Loans have become fairly common in everyone’s life. The cost of living continuously increases every year, and loans allow you to pay off your debt for a longer period of time. Although you have to pay more than what you borrowed, you have the chance to expand your business or start something new!
Loan on Education is Important
As mentioned earlier, college is expensive.
The average amount borrowed by students is $28,950
42.8 million borrowers have federal student loan debt
Student loan debts total $1.75 trillion
But, it’s not a cost with no reward. People who graduate college tend to earn more money.
High School Diploma: $1,304,000
Some College: $1,547,000
Associate Degree: $1,727,000
Bachelor's Degree: $2,268,000
Advanced Degree: $2,671,000
Higher education leads to higher income and with an average cost of $28,950 for a bachelor's degree, you’ll earn $1,000,000 more than a high school graduate!
Buying a house is a great loan
A mortgage will always cost less than rent in the long run. After your mortgage is done you won’t have any more monthly payments, but with rent, you’ll have to pay forever. Your rent will not stay the same year over year (it will increase), but your mortgage will if you choose a fixed mortgage rate. You also get full control of your house and own equity. If you were to sell your house, later on, you’ll be able to get your original equity plus the difference between the selling price and the loan.
Pros and Cons of Loans
Loans can help you when you’re tight on cash
Plenty of loan durations to choose from
You can improve your bad credit score
You can pay off other debt with new loans
You have to pay them back
Bad credits will result in a low chance of a loan
Interest starts racking up
Loans have fees
What do You Need to Qualify for a Loan?
Loans aren’t easily given to everyone. The person giving you the loan will have to go through background checks to make sure you are able to pay off this loan. First, you’ll need basic proof of identity including:
Other state-issued ID
Certificate of citizenship
After that, comes the most important criteria to secure the loan.
5 Requirements for Loans
Credit score and history
Debt-to-Income ratio (DTI)
What you should aim for
A minimum credit score of 670 - 670 is a good credit score and should allow you to get most loans. You’ll be able to get fair rates for this score. It’s best to aim higher and achieve near-perfect credit for the best loans
Consistent, Steady, High Income - Your goal should always be to have a higher income and pay a fair share. The fair share meaning, don’t do side jobs for cash and not report it. It’s best to report it because it will help you secure a higher loan for a lower rate. (It's illegal if you don't and you can be charged)
DTI Ratio less than 50% - Most loaners give loans to people with a debt-to-income ratio of less than 50%, but it’s best to aim for 35% to be safer and get a more attractive loan.
Are grants and scholarships different?
Yes, grants and scholarships are different! The only part they’re similar to is that you don’t have to pay it back. The qualification is what makes it different. Grants are given to people based on financial need while scholarships are merit-based and awarded based on academics, achievements, extracurricular activities, etc.
Now you have learned about grants and loans! You can view grants as a gift to help provide you with money for research, business, or education. Loans can be used by anyone to do whatever they would like with their money! Not everyone has experience or knowledge of grants, but almost everyone in the world has experience with loans. The U.S. national debt is overwhelming, with $31.2 trillion dollars as of now. The gross domestic product of the US is $25.7 trillion! The country has higher debt than value, yet they encourage us to go through these extent qualifications to get a loan! Check out US Debt Clock to watch how the money is circulating in the United States. Hope this article helped you better understand grants and loans!