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Federal vs. Private Student Loans: What’s the Difference?

When furthering your education beyond high school, most people borrow money to help cover the cost. Both federal and private student loans can be used to pay for college or graduate school, but these 2 loan types do have some key differences.

Rachel Velez • April 22, 2022

There’s no doubt that paying for college can be really stressful. Tuition, room and board, books, and transportation can all start to add up fast. A college education is an investment in your future, but it may be hard to afford without taking out student loans. Not all student loans are the same, and some can take a long time to pay back. Before borrowing, it’s best to make sure you have a good understanding of your loans and their terms.

According to the Federal Reserve, 30% of all adults who attended college in 2020 took on debt to help cover their education costs. So, you’re not alone if you have to use other sources of aid to pay for your education or if you’ve already taken out student loans.

Taking advantage of free or lower-cost financial aid, like grants, scholarships, or work-study programs to help fund your education is always a smart first step. But, your aid package might not come with enough money to cover the total cost of college, and that’s where student loans come in. 

When it comes to student loans, you might decide to take out federal loans, private loans, or a combination of the two. Understanding these 2 types of loans can help you make the best choice for you and your financial future.

In This Article

  1. 2 Types of Student Loans
  2. What Are Federal Student Loans?
  3. What Are Private Student Loans?
  4. Federal Loans vs. Private Loans: 5 Main Differences
  5. How to Get a Federal Student Loan
  6. How to Get a Private Student Loan
  7. FAQs
  8. Final Thoughts: Which Is the Best Option for You?

2 Types of Student Loans

There are 2 main types of student loans to choose from: federal loans, which are offered by the federal government, and private loans, which come from banks, credit unions, and online lenders. The type(s) of loan(s) you take out will depend on several factors, including your financial need, the number of years you’ll be in school, your family’s income, and the amount you’ve already borrowed.

First, let’s cover some basics. Learning a few common terms used to describe student loans can help make things easier to understand and also make the overall subject seem a little less scary. Let’s take a closer look at federal versus private student loans, so you can decide which funding option is right for you. 

What Are Federal Student Loans?

Federal student loans are funded by the U.S. Department of Education, and interest rates are the same for all borrowers. In general, federal student loans provide more flexibility than private student loans since borrowers don’t need a credit check to be considered (except for the Federal Direct PLUS Loans for parents and graduate students). Some federal student loans even offer income-driven repayment (IDR) plans, where the minimum payments are based on the borrower’s salary or income after college.

Types of Federal Loans

There are a few types of federal loans that are offered, and they’re awarded based on eligibility, including financial need. Here are 3 different categories of federal loans:

  • Direct Subsidized Loans (subsidized Stafford loans) are available to undergraduate students who show financial need.
  • Direct Unsubsidized Loans (unsubsidized Stafford loans) are available to undergraduate and graduate students who meet the eligibility requirements, but aren’t based on financial need.
  • Direct PLUS Loans are for graduate students and parents to pay for school expenses not covered by other aid. A credit check is required for these loans.

What Are Private Student Loans?

Private student loans are educational loans offered by private lenders, like banks, credit unions, and other financial institutions. These loans can help you pay for college after you’ve explored scholarships, grants, and federal student loans. You can apply for a private loan at any time and use the money for whichever expenses you wish, as long as they pertain to your college education.

Unlike most federal loans, private loans are not based on financial need. Your eligibility is based on your finances, such as your income, credit history, and credit score. A good credit score will qualify you for a better interest rate and loan terms. It may be challenging for many students to get approved for private loans on their own, but most lenders allow co-signers to improve the odds of getting approved. 

Federal Loans vs. Private Loans: 5 Main Differences

There are some key differences to know and think about when it comes to federal and private student loans. Many of these differences affect how you obtain the loans and how you deal with them in the long run. 

Let’s take a look at the 5 main differences:

1. Interest Rates

Federal Student Loans: Interest adds to the cost of your loan and is the deciding factor for many borrowers. Federal student loans typically beat private loans when it comes to interest rates. This is because when you take out a federal student loan, everyone is offered the same low, fixed rate that doesn’t change regardless of your credit score or income.

Private Student Loans: Private student loans are different as they give borrowers the option to choose between a fixed and variable interest rate. Variable rates will start off lower than fixed rates, especially during periods of low rates across the board, but they usually rise over time.

Fixed rates can be a safer bet since you know your rate won’t change or increase. But, if you have a steady income and plan to pay off your student loans quickly, a variable rate can be more beneficial as you can pay down the loan while the rates are low, avoiding those potential increases.

2. Application Process

Federal Student Loans: The application process for federal student aid, including loans, is completed online through the U.S. government by filling out the Free Application for Federal Student Aid (FAFSA). Students fill out this form in order to see how much they qualify for in federal loans. The process is usually pretty quick and painless and asks for basic personal and financial information. 

Private Student Loans: Private loans differ since they’re offered through various financial institutions. It ultimately depends on the bank or lender you’re using, but generally, the process is the same. The lender will ask you to fill out an application with your information that they’ll review and then determine your lending options. Private lenders typically process these applications fairly quickly, as they know you need the money to pay for school. 

3. Repayment Options

Federal Student Loans: Federal loans have a wide range of repayment plans to choose from, including graduated and extended repayment. Income-driven repayment (IDR) plan options are also available if your loan balance is too high for your income. With federal loans, there’s also a guaranteed 6-month grace period after you graduate or leave school before having to make monthly payments. 

Direct PLUS loans are excluded from this scenario and have no grace period, except for graduate and professional students, who automatically get a 6-month deferment after graduating, leaving school, or dropping below half-time enrollment. 

There’s also the potential opportunity for student loan forgiveness with federal student loans if you choose an IDR plan or if you qualify for loan cancellation programs such as Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness.

Private Student Loans: For private loans, on the other hand, repayment plans depend on the lender, but they may be more limited than federal loan options. Most lenders set you up on a repayment plan with fixed payments on a term of 10 to 30 years. You usually choose your repayment terms at the time you borrow and are expected to stick with them.

4. Loan Terms and Limits

Federal Student Loans: The loan terms for federal versus private loans can also look different. The standard loan term for federal loans is 10 years, whereas private lenders typically give you more time.

The borrowing limits are probably the biggest and most important difference when it comes to federal and private loans. For federal loans, a student can borrow Direct Subsidized and Unsubsidized loans between $5,500 and $12,500 per year.

Undergraduates can borrow up to $31,000 in subsidized and unsubsidized loans throughout their college career if they’re considered financially dependent on their parents or $57,500 total if they’re financially independent. This determination is based on the information from your FAFSA.

These borrowing limits can feel restrictive if you need more money to attend an expensive school. But, these maximums are put in place to help you keep your monthly debt payments affordable after you graduate.

Private Student Loans: For private loans, the borrowing limit varies from lender to lender, but generally, they’ll cover the cost of your education minus other financial aid, or up to 100% of the total cost of attendance. The general loan term for private loans is about 15 to 20 years. A longer-term might mean lower minimum monthly payments up front, but you might pay more over the life of the loan in the end.

Private loan lenders are in the business of lending out money to make a profit, so these institutions will typically lend you however much you need. This is only the case, of course, if you’re creditworthy, and be mindful of how much you take out since you’ll have to pay that money back one day.

5. Credit Requirements

Federal Student Loans: There’s no credit check for most federal student loans. Subsidized and unsubsidized federal loans are not based on your credit score, meaning any student can qualify. However, Direct PLUS loans for graduate students and parents do come with credit requirements, such as borrowers having no “adverse credit history.”

Private Student Loans: Private loans differ since lenders usually perform a much more in-depth credit check on all applicants. They can deny a borrower altogether or charge higher interest rates if the applicant’s credit score and income don’t meet their standards. Most private lenders require good to excellent credit to be approved for a loan. The majority of undergraduates are required to apply with a co-signer, since they typically can’t meet the credit and income requirements on their own.


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How to Get a Federal Student Loan

When borrowing money using federal student loans, you must first complete and submit a FAFSA form. This application is used to determine if you’re eligible for federal student loans. The FAFSA asks questions about your or your parents’ income and investments, along with other personal information. Using the information from your FAFSA, the government figures out your Expected Family Contribution (EFC). They’ll use this information to determine what aid you’re eligible for, including loans, grants, and work-study programs.

If you borrow money with federal student loans, you must meet eligibility criteria. As the source cites, you must:

  • Be a U.S. citizen or eligible noncitizen
  • Have a valid Social Security number
  • Be enrolled or approved to enroll in an eligible degree or certificate program
  • Be enrolled at least half-time (for Direct loans)
  • Be making the required academic progress

How to Get a Private Student Loan

Private lenders have different applications for aid that you can typically find on their websites. The information you’ll need will vary by company, but you’ll likely need similar documents to what you need for applying for federal aid to verify your identity and income. Private lenders will check your credit score to determine your eligibility for a loan, much like the federal government does with Direct PLUS Loans. 

You should also research private loan offers and their terms before formally submitting an application. Once you’ve gathered all the information and made a decision, it’s time to collect all of the documents you’ll need to fill out the application. 

There are times when it can make sense to first apply for private student loans before exploring federal loans. This mostly applies to instances where you have excellent credit, and you can qualify for an interest rate that is lower than the current federal loan rate, or you have a co-signer with exceptional credit who is willing to help you get that lower rate.


Does student loan forgiveness include private loans?

There’s no student loan forgiveness for private student loans. But, you might have other options, such as refinancing or payment assistance programs, to reduce payments. Unlike federal student loans, private student loans are funded by private lenders, so they don’t qualify for student loan forgiveness.

Can I refinance my federal student loans and my private loans?

The answer is yes. After graduating and all of your student loans are out of deferment or forbearance, you can refinance through a different lender or financial institution if you’re eligible. 

Most of the time, people find that their federal student loan interest rates are already relatively low, and they probably won’t be offered a better rate anywhere else. But, a lot of individuals look to refinance their private student loans since those interest rates can skyrocket fast, especially when dealing with a variable interest rate.

Can I take out both federal and private student loans?

There are borrowing limits for federal student loans, which is why many people get a mix of federal and private loans to cover their educational expenses. Parents and students can take out private and federal student loans at the same time, and many borrowers have both. If you do take out a mix of both federal and private loans, be aware that some of your loan details, such as your statements and related documents, may look similar since several student loan servicers manage both federal and private loans. 

What are the interest rates for federal student loans?

Federal student loan interest rates are typically lower than rates for private loans. Here are the federal interest rates for the 2022-2023 school year as reported on the government site:

Type of LoanBorrower TypeInterest Rate (Fixed)
Direct Subsidized Loans and Direct Unsubsidized LoansUndergraduate3.73%
Direct Unsubsidized LoansGraduate or Professional5.28%
Direct PLUS LoansParents and Graduate or Professional Students6.38%

Keep in mind that interest rates ultimately depend on the type of federal loan you apply for and are subject to change every school year.

Are Stafford, Sallie Mae, and Navient loans federal student loan providers?

Stafford loans are a type of federal student loan that can be subsidized or unsubsidized. On the other hand, Sallie Mae is a financial institution that offers private loans for college and graduate education. Navient no longer services federal student loans but still services private student loans and offers student loan refinancing.

Final Thoughts: Which Is the Best Option for You?

Student loans are one of the many resources available to help students and their families pay for college. Federal and private student loans both have pros and cons, depending on your financial circumstances. It’s usually best to use federal student loans to meet your financing needs, but there are some instances where it can make sense to consider private loans. 

Take your time by looking at all of your options and how they might affect you now and in the future, so you can make the best financial decision. To find the best fit, carefully weigh your options, and be sure to read the fine print on any loan document or application before committing to a student loan.

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