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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 only available through the federal government, private student loans can come from a number of different 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. But if you’ve maxed out your federal loans, it may be worth considering private student loans.

Federal vs. private student loans at a glance

Federal student loans Private student loans
Interest rates 3.73% to 6.28% fixed 2.94% to 13.16% fixed, 0.94% to 11.98% variable
Loan terms Standard term is 10 years 5 to 20 years
Loan amounts Up to $31,000 total for dependent undergraduates, $57,500 for independent undergraduates and 100% total cost of attendance for graduates Often up to 100% total cost of attendance
Where to apply FAFSA Lender websites
Main benefits Income-driven repayment plans, loan forgiveness options, extended deferment and forbearance Low starting rates, many repayment options, additional perks
Main drawbacks Higher rates for good-credit borrowers, no variable rates High rate caps, few borrower protections
Who is it best for Most borrowers Borrowers with extremely good credit who plan to pay off their loan quickly

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. Federal loans also come with a variety of benefits that can make your repayment plan more affordable.

There are a few main types of federal student loans. Direct Subsidized Loans are available for undergraduate students with financial need, and they cover all accrued interest while you’re in school and during deferment and grace periods. Direct Unsubsidized Loans don’t cover your interest, but they’re available for both undergraduate and graduate students, regardless of financial need. Direct PLUS Loans are offered to graduate students and parents, and they’re the only type that doesn’t have a dollar-amount cap on how much you can borrow.

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: Only federal loans offer loan forgiveness programs like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness. If you qualify for a loan forgiveness program, you could end up having tens of thousands of dollars in student loan debt forgiven 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 of your discretionary income. If you end up struggling to make your monthly payments, these plans can be a huge lifesaver.
  • Few to no credit requirements: Most federal student loans don’t require a credit check at all. With Direct PLUS Loans, a credit check is used only to determine if you have certain negative items on your credit history. If you haven’t had the chance to build a credit history, you will still qualify for federal loans.
  • Generally cheaper: For most students, federal student loans are likely cheaper than private student loans. This is especially true 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: Undergraduate students are limited in how much they can borrow, which may require them to ultimately turn to private student loans to bridge the gap.
  • No choice of servicer: When you apply for federal student loans, the Department of Education assigns a loan servicer to you automatically. If you have a bad experience, you can consolidate your loans with another servicer, but the consolidation process does have some downsides.

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 most lenders let you 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. You may be able to get on a forbearance plan if you end up struggling financially, but options for lowering your monthly payment on a permanent basis are scarce.
  • High interest rates for most: 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 for a private loan in the first place.

What type of student loan is best for me?

Federal student loans are the best starting point for most college students and their parents, since these loans come with benefits and protections that can’t be matched by private lenders. However, there are a few instances when you should consider private student loans.

For example, if you’ve exhausted the federal student loan limit, private loans could 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 a better offer.

In the end, the best student loan for you comes down to your financial health, the amount you need to borrow and how quickly you anticipate paying back the loan. If you can pay back your loan quickly and can qualify for a low interest rate, a private student loan may be best. 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.

Can I take out federal and private student loans?

Parents and students can take out private and federal student loans at the same time. In fact, many borrowers have some of both. Dependent students, for instance, can take out only $5,500 in federal student loans in their first year of college, which may fall well short of their total educational costs. In this scenario, taking out a private loan in addition to a federal loan may be the only way to cover those costs.

If you do take out a mix of both federal and private loans, be aware that some of your loan details may look similar; several student loan servicers manage both federal and private loans, so you may work with the same servicer for two different types of loans.

The bottom line

Whether you’re a college student or a parent, federal and private student loans are available to help fund an education. It’s usually best to use federal student loans to meet your financing needs, but there are some instances where it can be worthwhile to consider private loans.

Take your time examining 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