Federal vs. private student loans: Everything you need to know

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Federal and private student loans are two ways college students can pay for their education. While federal loans are available only through the federal government, private student loans can come from a number of private lenders. Federal and private student loans have different interest rates, repayment terms, hardship options and fees.

In most cases, federal student loans are preferable because of the benefits they come with. However, in instances where you’ve exhausted your allotment of federal loans, it may be worth considering private student loans. As you compare federal and private student loans, it’s important to understand the differences and how they might impact you throughout school and during repayment.

What are federal student loans?

Federal student loans are educational loans that are available through the U.S. Department of Education. For each type of loan, the interest rate is the same for all borrowers, so you don’t have to worry about what your rate will be. Federal loans also come with a variety of benefits that can make your repayment plan more affordable.

Benefits of federal student loans

There are several benefits to using federal student loans to help fund your college education, including:

  • Access to loan forgiveness: The Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness programs are available only for federal student loan borrowers. If you qualify for one of the programs, you could have as little as $5,000 or as much as your full student loan balance discharged once you meet the requirements.
  • Access to income-driven repayment plans: The Department of Education offers several income-driven repayment plans, which can reduce your monthly payment to as little as 10 percent to 20 percent of your discretionary income. If you end up struggling to make your monthly payments, these plans can be a lifesaver.
  • Few to no credit requirements: Most federal student loans don’t require a credit check at all. With Direct PLUS Loans, the credit check is only to determine if you have certain negative items on your credit history. If you have no credit history or you haven’t had the chance to build a good one, federal loans are still available.
  • Generally cheaper: For most students, federal student loans are likely cheaper than private student loans. This is especially the case for undergraduate students.

Drawbacks of federal student loans

Although there are some clear benefits to using federal loans, here are some potential pitfalls to watch out for:

  • Upfront fees: The federal government charges an upfront loan fee on all of its loan products. The fee is relatively low for undergraduate students but high for graduate and professional students, as well as for parents.
  • Loan limits: Students are limited in how much they can borrow, which may require them to ultimately turn to private student loans to bridge the gap if their tuition costs are high.
  • No choice of servicer: When you apply for federal student loans, the Department of Education assigns a servicer to you automatically. If you have a bad experience, you can consolidate your loans with another servicer, but that process results in a slightly higher interest rate.

What are private student loans?

Private student loans are educational loans offered by private lenders, like banks, credit unions and online companies. They require a credit check, and your approval and loan terms are dependent on your creditworthiness. It may be challenging for many students to get approved for private loans on their own, but a lot of lenders allow you to apply with a co-signer to improve your odds.

Benefits of private student loans

Although it’s best for most students to start with federal student loans, there are some advantages to using private loans if necessary:

  • Higher loan amounts: Loan limits can vary from lender to lender, but you can generally get up to the total cost of attendance, giving you more borrowing power than with the federal government.
  • Chance for low interest rates: If you’re a graduate or professional student or a parent, it is possible to get a lower interest rate through a private lender than through the federal government if you have good credit — sometimes a rate three or four percentage points lower than the federal rate.
  • No upfront fees: Private lenders typically don’t charge upfront loan fees on private student loans, giving you savings right off the bat.

Drawbacks of private student loans

Before taking out a private student loan, consider some of the downsides:

  • No federal loan benefits: Private lenders don’t offer student loan forgiveness programs, and most of them don’t offer income-driven repayment plans. If you end up struggling financially, you may be able to get on a forbearance plan, but options for lowering your monthly payment on a permanent basis are scarce.
  • High interest rates for many: Because private loans require a credit check, people with no credit history or a low credit score may end up with a more expensive loan than what the federal government offers — and that’s if you qualify in the first place.

Types of federal student loans

Depending on where you are in school and your needs, there are a few different federal student loans from which you can choose:

  • Direct Unsubsidized Loans: Available for undergraduate, graduate and professional students, these loans come with a fixed interest rate, and interest begins accruing as soon as the loan is disbursed. The lifetime loan limit is $31,000 for dependent undergraduate students, $57,500 for independent undergraduate students and $138,500 for graduate students.
  • Direct Subsidized Loans: Available for undergraduate students who exhibit financial need, the interest that accrues on these loans is paid by the federal government while you’re in school and during future deferment periods after you graduate. The lifetime loan limit is $23,000.
  • Grad PLUS loans: These loans are designed for graduate and professional students. They let students borrow up to the full cost of their education, but they also charge a higher loan fee and a higher interest rate than Direct Unsubsidized Loans.
  • Parent PLUS loans: The only federal loans available to parents, this option charges the highest interest rate of all federal student loans. They also have limited access to income-driven repayment plans, with just one option instead of four.

Types of private student loans

Private student loan options can vary by lender, but you can generally choose a program based on your specific needs. Options can include:

More specialized loans for graduate programs may allow you to borrow more in total, but they also typically charge higher interest rates than traditional undergraduate and graduate loans.

What type of student loan is best for me?

Federal student loans are generally the best starting point for most college students and even parents, since they come with flexibilities and protections that can’t be matched by private lenders. However, there are a few reasons why you may choose to look for private student loans.

For example, if you’ve exhausted your allotment of federal student loans, scholarships, grants and work-study programs, you may still need private loans to finance the remainder of your education. And if you’re a graduate or professional student or a parent facing higher interest rates on federal loans, it might not hurt to shop around and compare rates with various private lenders to determine if you can get better terms.

In the end, the best student loan for you comes down to your financial health, your borrowing needs and how quickly you anticipate paying back the loan. If you can pay back your loan quickly and can get a great interest rate, a private student loan may be best for you. If you’d like to take advantage of income-driven repayment plans, extensive deferment programs and potential loan forgiveness, a federal student loan is the best option.

The bottom line

Whether you’re a college student or a parent, federal and private student loans are available to help you pay for your education or your child’s. For the most part, it’s best to turn to federal student loans first to meet your financing needs. But there are some instances where it can be worth it to consider private loans.

Take your time to consider all of your options and how they might affect you now and in the future so you can make the best financial decision for you.

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Written by
Ben Luthi
Contributing writer
Ben Luthi is a personal finance and travel writer who loves helping people learn how to live life more fully. His work has appeared in several publications, including U.S. News & World Report, USA Today, Yahoo! Finance and more.
Edited by
Student loans editor