Federal Pell Grant vs. Stafford Loan

College costs are alarmingly high, with the National Center for Education Statistics reporting that the average cost of tuition, room, and board is $13,564 per year at public schools and $32,026 at private schools, as of 2011. At the same time, "The New York Times" reports that the typical family with an income of $75,000 per year can only afford to pay $10,000 per year for college costs, making financial aid necessary. Two of the most common types of aid from the federal government are Pell grants and Stafford loans, or federal direct loans. These two types of aid have key differences.

The key difference between Pell grants and Stafford loans is that Pell grants do not need to be repaid. They are essentially the government's way of giving a tuition break to students who need it. If you are offered a federal Pell grant, take it. Borrowers must repay Stafford loans beginning six months after they drop below half-time attendance, whether they earned a degree or not. The federal government offers a range of repayment plans, including 10-year repayment and several plans that base monthly payments on the borrower's annual income.

The application process for both federal Pell grants and Stafford loans requires submitting the Free Application for Federal Student Aid. The FAFSA asks a wide range of questions to assess the student's financial situation. The parents also must answer questions if the student is a dependent undergraduate, which most undergraduates are. Married students fill out the FAFSA with their spouse. Students learn what grants and loans they have been offered when they receive the financial aid award package from the college's financial aid office. Award notification letters usually arrive in late spring.

All students must meet the federal government's basic eligibility criteria for both Pell grants and Stafford loans. Criteria include being a U.S. citizen or eligible noncitizen, such as a permanent resident with a Social Security number, having a high school diploma, and not being in default on previous federal student loans. Eligibility for Stafford loans does not require that the student have financial need; students who receive Pell grants must be able to exhibit financial need. The government calculates financial need based on the difference between the cost of attending school and the amount of the estimated family contribution. This is what the student's household is expected to contribute, based on taxable and untaxable income, savings, and investment assets reported on the FAFSA.

During the 2012 to 2013 school year, the maximum Pell grant amount available was $5,550. Many students received smaller grants because their expected family contribution was too high to receive the full grant or because the student was only planning to attend part-time. The maximum Stafford loan amount varies depending on the student's year in school. Undergraduates can generally borrow up to $5,500 the first year, $6,500 the second year, and $7,500 each subsequent year. Graduate students can borrow up to $20,500 per year. Student borrowing is capped at the cost of attendance minus all other financial aid received.