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Grants, scholarships, and student loans can all help you pay for your education. But there are key differences between the three — namely, how they award funds and whether you need to repay those funds. Grants and student loans often depend on financial eligibility and need, while scholarships tend to be merit-based. And while both grants and scholarships don’t need to be repaid, student loans do.

Here’s a breakdown of how student loans and grants vs. scholarships work, as well as some of their key differences.

What Is a Student Loan?

A student loan is money borrowed for educational expenses that has to be paid back (usually with interest). You can take out a loan from a bank, an online lender, a college or university, or the state or federal government. If you’re wondering about grants vs. loans, both are based on financial need, but what sets them apart is that grants don’t need to be repaid and student loans do.

So, how do student loans work? Loan terms for college can vary based on a few different factors: whether they’re federal (offered by the government) or private (offered by a financial institution), whether you choose fixed or variable interest rates, how long it takes to pay the loan back, and how much can be borrowed. Loans offered to you could be based on your credit score or the personal financial information you supply on the Free Application for Federal Student Aid (FAFSA®).

How to Apply for Student Loans

To determine your eligibility for a student loan from the federal government, you must fill out the FAFSA. States and colleges may use information from your FAFSA to determine state and school-specific aid, as will some private financial aid providers.

To fill out the FAFSA form, you’ll need a few pieces of information, including:

•   Your Social Security number or alien registration number (if you are not a U.S. citizen)

•   Your driver’s license number (if you have one)

•   Federal income tax returns, W-2s, and other records of money earned

•   Bank statements and records

•   Records of untaxed income (if applicable)

•   Information on account balances, investments, and assets

•   FSA ID for electronic signature (this is your username and password needed to access and submit your FAFSA online)

If you are applying as a dependent student, you will need all of the above information from your parent(s) as well.

What Is the Difference Between Unsubsidized and Subsidized Loans?

There are two primary types of federal student loans: subsidized loans and unsubsidized loans. The main difference between unsubsidized and subsidized loans is how the interest accumulates through the life of the loan.

Unsubsidized loans are available to undergraduate and graduate students, regardless of any financial need. An unsubsidized loan starts accruing interest as soon as the loan is dispersed. That means if you accept an unsubsidized loan during your freshman year of college, the loan will accumulate interest throughout the rest of your time in school.

You are responsible for starting to pay back an unsubsidized loan six months from when you graduate or if you drop below half-time enrollment. Because of the interest capitalizing on your unsubsidized loan from the day it’s disbursed, your loan balance will likely be more than what you originally borrowed if you don’t make interest payments while you’re in school.

A subsidized loan, on the other hand, is a need-based loan available to undergraduate students on which interest accumulates only after you begin repayment. The government will pay the interest while you’re in school at least half-time or until you graduate and for the first six months after, as well as during a period of deferment.

Like unsubsidized loans, repayment for a subsidized loan typically occurs after a six-month grace period from when you graduate or drop below half-time enrollment. You are responsible for paying back the total outstanding balance, plus interest. There are plenty of ways to pay off federal loans, from the standard 10-year repayment plan to income-based repayment plans.

Pros and Cons of Loans

Pros of student loans include:

•   Access to education: Enables students to attend college who otherwise might not be able to afford it.

•   Flexible repayment options: Federal student loans offer flexible repayment options, including income-based repayment plans.

•   Credit building: Paying back student loans on time each month can help establish and build credit history.

•   Fixed interest rates: Federal student loans (and some private student loans) offer fixed interest rates, making monthly payments predictable each month.

Cons of student loans include:

•   Debt burden: Student loans increase debt load and debt-to-income ratio, which can lead to financial strain and/or make it hard to qualify for other loans in the future.

•   Interest accumulation: Interest starts accumulating immediately on unsubsidized loans and private loans. This increases the overall amount that needs to be repaid.

•   Stress and anxiety: Debt of any kind, including student loans, can cause significant stress and anxiety, which could impact your overall well-being.

What Is a College Grant?

A grant can be beneficial to students because it is financial aid that does not have to be repaid. That’s one main difference between a grant vs. a loan. Grants may be obtained directly from your university, the federal government, state government, or a private or nonprofit organization. It is important to note that you may be required to meet certain financial eligibility criteria, depending on the grant.

When it comes to a grant vs. a scholarship, grants are typically awarded based on need, not on academic achievement or merit. Scholarships are based on merit.

One popular type of college grant is the Pell Grant. Pell Grants are given to undergraduate students with significant financial need, which means they are typically awarded to low-income students.

Do You Have to Pay Back Grants?

In most cases, you do not need to pay back grants as long as you maintain eligibility. If, for example, you decide to drop out of school, you might be required to pay back certain grants.

You might also need to pay back grants if you withdraw early from a program in which the grant was awarded, or if you did not meet a service obligation, as is required for the Teacher Education Assistance for College and Higher Education (TEACH) Grant, for example.

How to Apply for Grants

To apply for grants, start by researching and identifying grants for which you qualify, focusing on those specific to your field of study, background, or needs. Visit the official websites of grant providers, such as federal and state governments, educational institutions, and private organizations, and carefully review their eligibility requirements and application deadlines. Prepare all necessary documents, which may include academic transcripts, letters of recommendation, a personal statement, and financial information.

Also, you’ll need to fill out the FAFSA if you are in the United States, as it is often required for federal and state grants.

Pros and Cons of Grants

Pros of grants include:

•   No repayment required: Grants are essentially free money that does not need to be repaid, making them highly beneficial for students.

•   Financial relief: Provide significant financial assistance, reducing the amount of student loans needed and easing the financial burden of education.

•   Encourages academic excellence: Some grants are merit-based, encouraging students to maintain high academic performance.

Cons of grants include:

•   Highly competitive: Grants are often limited in number and highly sought after, making them difficult to obtain.

•   Strict eligibility requirements: Many grants have specific criteria that must be met, which can exclude a significant number of applicants.

What Is a Scholarship?

Scholarships are a great way to finance higher education, simply because there are thousands of available scholarships based on financial need or merit. That’s the main difference between scholarship and grant: Scholarships are often merit-based. Scholarships can come from a variety of sources and typically do not need to be repaid.

How to Apply for Scholarships

It can be easy to feel overwhelmed with the amount of time it takes to hunt for scholarships — here are a few tips to help you find scholarships to apply for:

•   Start by combing scholarship databases for any scholarship that may align with your interests or background. Don’t be afraid to tell people you know that you are looking for scholarships either — your best friend or neighbor may have heard of a scholarship you could be eligible for.

•   Take a look at your academic achievements. Have you maintained a certain GPA or did you make the Dean’s List? There could be a scholarship for that. List out your community involvements and start researching whether your softball league, for example, offers scholarships.

•   Make a list of all the things that make you who you are. List out your heritage and things that your family members have been involved with over time. Perhaps your grandmother belongs to the National Corvette Club or your grandfather was a veteran, both of which could present scholarship opportunities.

Once you have your list, it helps to stay organized by adhering to deadlines and application requirements. Stick to what feels doable so you can knock out several applications in a row. Scholarship application formats vary from essay writing to creating a video to simply filling out a form.

Important documents you might need when applying for scholarships include birth certificates, SAT/ACT scores, academic transcripts, certifications, or ID cards. Be sure you have those handy prior to hitting search engines and applying for the next available scholarship you find.

Pros and Cons of Scholarships

Pros of scholarships include:

•   No repayment needed: Scholarships provide financial assistance that does not need to be repaid, reducing the overall cost of education.

•   Merit recognition: Often awarded based on academic, athletic, or other achievements, recognizing and rewarding students for their talents and hard work.

•   Boosts resume: Being awarded a scholarship can enhance a student’s resume, showcasing their achievements and dedication.

•   Encourages academic excellence: Incentivizes students to maintain high academic standards and strive for excellence in their endeavors.

Cons of scholarships include:

•   Highly competitive: Scholarships can be very competitive, with many applicants vying for a limited number of awards.

•   Strict criteria to qualify: Strict eligibility criteria may exclude many students from qualifying for certain scholarships.

Grants vs Scholarships vs Loans

Now that you have a grasp on all three forms of financial aid, let’s examine the main difference between scholarships, grants, and student loans.

What Is the Difference Between a Loan and a Grant?

Here’s what makes grants vs. loans different: A student loan — whether it is unsubsidized or subsidized, federal or private — must be repaid with interest. A grant typically does not need to be repaid as long as you maintain eligibility requirements.

What Is the Difference Between a Grant and a Scholarship?

When looking at a grant vs. scholarship, the primary difference between the two is that a grant is typically need-based while a scholarship is usually merit-based. You might receive a scholarship for a number of things, such as high academic achievement, organization or club involvement, or ancestry. A grant is typically awarded based on financial need and can be specific to certain degrees, students, and programs.

How Is a Student Loan Different from a Scholarship?

A student loan is different from a scholarship primarily in that a student loan must be repaid and a scholarship does not need to be repaid. Scholarships can come from a variety of sources, including nonprofit organizations, private companies, universities and colleges, and professional and social organizations. Student loans may come from private lenders, federal or state governments, or colleges and universities.

The two types of student loans are federal student loans and private student loans. Federal student loans should be utilized first, as they typically come with better interest rates and borrower protections, such as income-driven repayment plans and student loan deferment. Private student loans can help fill in the gaps between federal loans, grants, and scholarships.

The Takeaway

With a good understanding of scholarships vs. grants vs. student loans under your belt, you can better determine which form of financial aid is right for your situation. Remember that you don’t necessarily have to choose just one.

Once you’ve maximized the money you can get from grants or scholarships that you likely won’t have to pay back, you may consider bridging the remaining gap by taking out a student loan.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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SOIS-Q224-1920923-V1

An intermediary bank is a bank that acts as a go-between, connecting two different banks as transactions are processed. Smaller banks require intermediary banks or correspondent banks to facilitate transactions with other banks, while larger banks may have enough connections to serve as their own intermediaries.

Intermediary banks are commonly used for international wire transfers and handling multiple types of currencies. Generally, retail bank customers do not have to worry about finding intermediary banks — instead, they work behind the scenes with the banks themselves. Read on to learn more about these important financial institutions.

What Is an Intermediary Bank?

An intermediary bank is a third-party bank that helps facilitate transfers and transactions between two other banks. Often, intermediary banks are dealing with international transactions such as wire transfers between different countries. If you are sending money to others abroad, your bank may end up using an intermediary bank.

You may not be aware of how the intermediary banks work behind the scenes, but it’s important to note that you may be charged additional bank fees for the work that intermediary banks are doing.

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How Do Intermediary Banks Work

If you are doing a bank account transfer, especially to an account in a different country than the one where your own bank is located, it is likely that an intermediary bank will be involved. During a monetary transfer between accounts at different banks, an intermediary bank works in between the sender’s checking or savings account and the account at the receiving bank.

Here’s how the transaction might work:

•   A person with an account at Bank A wants to send money to another person, a client with an account at Bank B.

•   However, Bank A doesn’t have an account or banking relationship with Bank B.

•   Bank A and Bank B do, however, each have an account with Bank C.

•   Funds can be funneled through Bank C, the intermediary bank, to make the transaction successful.

Intermediary Bank Example

Intermediary banks are like an international travel hub through which transfers flow. They are especially important for fund transfers made via the SWIFT (Society for Worldwide Interbank Telecommunications) network.

Here’s a simple example to show how intermediary banks usually work.

•   Say that John is an importer-exporter based in the United States who banks at the Acme Bank. He needs to make a payment to Angela, a supplier of his based in Germany, who banks with Big Bank.

•   He gives Angela’s bank’s information to his bank to make the transfer. If Acme Bank does not have an account at or a relationship directly with Big Bank (Angela’s bank), it will use an intermediary bank called Central Bank. This intermediary bank will have accounts at both Acme Bank, John’s bank in the United States, as well as Big Bank, Angela’s bank in Germany.

•   Central Bank can transfer the money between the two banks. It will likely charge a fee for its role in the transaction. The transaction will be completed by the three banks working together.

Recommended: How Retail Banking Works

When Is an Intermediary Bank Required?

Any time that money is being transferred between two banks that do not have an existing relationship, an intermediary bank is usually involved. Whether you have a single account or a joint bank account, when you transfer money to a user at a different bank (especially internationally), an intermediary bank will generally be required.

This is likely to occur as a commercial banking transaction. In other words, the use of an intermediary bank is not something the consumer has to initiate.

The Need for Intermediary Banks

Intermediary banks are important as part of the global financial system. Since banks generally do not have accounts with every single bank around the world, there is a need for intermediary banks to help facilitate monetary transfers.

The good news is that you typically do not have to worry about finding an intermediary bank yourself. Instead, the banks themselves have intermediary banks that they use to move money between other banks.

When Will an Intermediary Bank Be Involved in a Transaction?

An intermediary bank will usually be involved whenever there is a need to transfer money between accounts at two separate banks. If the sending bank does not have its own account with the receiving bank, it will usually use an intermediary bank.

Even if a business thought it could get around the need for intermediary banks (and save money; see more on fees below) by opening multiple bank accounts, its main bank would still probably use an intermediary bank at some point to transfer funds on its behalf.

Difference Between Intermediary and Correspondent Banks

When considering how bank transfers work, you may hear two different terms: intermediary banks and correspondent banks. Depending on which part of the world you’re in, there may or may not be a difference between the terms “intermediary bank” and “correspondent bank.”

•   In some countries, the terms correspondent banks and intermediary banks are used interchangeably.

•   In the U.S. as well as in a few other countries, correspondent banks are often ones that handle multiple types of currencies.

•   Intermediary banks may be smaller banks that only typically handle transactions in one currency.

What Are Some Typical Intermediary Bank Fees?

Because intermediary banks typically do not work directly with consumers, they also do not regularly post a breakdown of the fees they charge. Instead, you can look at your own bank’s fees for financial transactions such as domestic wire transfers or international wire transfers.

The wire transfer fees and other charges that you pay for these transactions generally include the fees that your bank pays to the intermediary bank it uses. These bank fees can range anywhere from $15 to $50 or more.

Recommended: How Do Banks Make Money?

Who Pays for Intermediary Bank Fees?

Intermediary bank fees are paid in different ways, depending on the specific transaction. Let’s say Person A is sending money to Person B. There are three ways the fees may be handled, depending on what the parties involved agree upon:

•   “OUR” is the code used when the sender will pay all fees. The fee for an international transfer can be as high as $70.

•   “SHA” is the code indicating shared costs. Person A will likely pay their bank charges (perhaps $15 to $30 on a typical transaction) and then Person B pays the rest: their bank’s and the intermediary bank’s charges.

•   “BEN” indicates that Person B, the recipient of the funds, will pay all charges.

The Takeaway

If a bank customer wants to send money to someone at a different bank and the two banks involved are not connected, an intermediary bank typically plays a role. Intermediary banks work to help facilitate monetary transactions such as domestic and especially international wire transfers. You, as a consumer, usually do not have to hire your own intermediary bank. However, your bank will likely pass along any intermediary bank fees if you initiate a transaction that requires one.

International money transfers are likely just one aspect of the services you use with your bank.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is an example of an intermediary bank?

An intermediary bank is one that moves funds between other banks. They do not typically work directly with consumers, so you likely neither need to know their names nor contact them. For instance, Bank of America might offer this service, or it might be provided by a foreign bank with which you are not familiar.

Why do you need an intermediary bank?

Intermediary banks are usually used when someone needs to send money to a person with an account at a different bank. An intermediary bank can serve as a middleman and facilitate the transaction. One common example is sending a wire transfer, especially internationally.

How do you find an intermediary bank?

In most cases, you will not need to find your own intermediary bank. The bank you use will have its own intermediary bank that it collaborates with as needed.

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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

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SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.