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

When comparing federal vs. private student loans, federal loans should almost always be your first choice. They offer fixed interest rates, flexible repayment options, and borrower protections like loan forgiveness and deferment. Plus, they don’t require a credit check or cosigner, making them more accessible to students.

Private student loans, on the other hand, often require a cosigner, may have variable interest rates, and lack the same borrower protections. They can help fill funding gaps when federal aid isn’t enough, but they come with more risk. Here’s how the two options compare—and when private loans might make sense.

Table of Contents

1. Differences between federal and private student loans
2. What is the advantage of federal loans over private loans?
3. When to consider private student loans
4. Should you choose federal or private loans first?
5. FAQ

Differences between federal and private student loans

Feature	Federal student loans	Private student loans
Eligibility	Must meet Department of Education requirements	Must meet credit and income requirements
Interest rates	Fixed, standardized based on loan program	Fixed or variable, vary based on creditworthiness
Repayment options	Standard, graduated, extended and income-driven repayment plans	Immediate, interest-only, deferred repayment plans
Repayment terms	10 – 30 years	5 – 20 years
Borrowing limits	Varies by loan program	Usually up to your total cost of attendance
Subsidies	Subsidized interest for eligible undergraduate students	None
Forgiveness programs	Public Service Loan Forgiveness, Teacher Loan Forgiveness, and many more	None
Other relief options	Generous forbearance, deferment, and discharge for eligible borrowers	Forbearance and deferment options vary by lender

I recommend federal loans over private loans 95%+ of the time due to their flexibility of repayment and the deferment, forbearance, and forgiveness provisions.

What is the advantage of federal loans over private loans?

While federal and private student loans share the same purpose, they differ greatly in how they’re structured and repaid. Here’s more on how the two types of student loans compare.

Eligibility requirements

To qualify for federal student loans, you must meet the Department of Education’s eligibility criteria, including:

• U.S. citizenship or eligible noncitizen status
• Enrollment at least half-time in an eligible degree or certificate program
• Satisfactory academic progress
• Completion of the Free Application for Federal Student Aid (FAFSA)
• Financial need (for need-based programs like Direct Subsidized Loans)

Most federal loans, such as Direct Subsidized and Direct Unsubsidized Loans, don’t require a credit check, but PLUS loans—available to graduate students and parents—do check for adverse credit history (though no minimum credit score is required).

For private student loans, lenders typically require:

• A credit score of 670 or higher
• Proof of income and a low debt-to-income ratio
• Enrollment at least half-time at an eligible school (some lenders allow part-time students)

If you don’t meet these requirements, you may need a creditworthy cosigner to qualify for better rates and terms.

Rates and fees

Federal student loan interest rates are fixed and standardized, meaning every borrower approved for a specific loan type receives the same rate, and it won’t change over time. If you’re an undergraduate student with financial need, you may qualify for Direct Subsidized Loans, where the government covers interest charges while you’re in school at least half-time and during deferment periods.

That said, federal loans come with an upfront loan fee, deducted from your disbursement. For loans disbursed between Oct. 1, 2023, and Sept. 30, 2024, the fees are 1.057% for Direct Subsidized and Unsubsidized Loans and 4.228% for PLUS Loans.

In contrast, private student loan interest rates may be fixed or variable. A variable rate can change over time, affecting your monthly payment. The rate you qualify for depends on your creditworthiness, and private lenders typically don’t charge an upfront loan fee.

Repayment options

The standard repayment plan for federal student loans is 10 years, and payments are generally deferred until you leave school. However, depending on your situation, you may be able to extend that up to 30 years. 

Federal loan repayment plans also offer some flexibility with how your payments are structured. For example, if you’re struggling to keep up, you could switch to an income-driven repayment plan. 

In contrast, private student loan repayment terms can range from five to 20 years, depending on which lender you choose. However, you can’t change your repayment term later on, unless you refinance into a different private loan. Students can typically defer payments until after graduation, or they can start making full or partial payments immediately.

Borrowing limits

The amount you can borrow with federal loans can vary depending on your student status and the loan program you choose. If you’re a first-year undergraduate student, for instance, you may be able to borrow up to $9,500 that year. 

Over time, the undergraduate limit increases to $12,500 annually, though there are also aggregate limits. However, if you’re a graduate student and apply for a Direct PLUS loan, the limit may be up to the total cost of attendance minus any other financial aid you’ve received. 

With private student loans, on the other hand, you can typically borrow up to the total cost of attendance minus other aid received. 

There is a risk of overborrowing any type of loan. For starters, you really shouldn’t be able to borrow more than your loan balance is. If you do, though, you are subjecting yourself to more debt than you would need.

This results in paying more interest over time, with limited options to lower your monthly payment due to them being private loans. If you can’t handle these monthly payments, you risk defaulting on these loans, which would have a horrendous impact on your credit score. It is more difficult to handle your regular expenses if you have a larger-than-necessary debt that you are paying off.

If you overborrow and try to get other loans (for example, a mortgage), the lender may not offer you the loan you desire because your cash flow is already being driven toward too high debt payments.

If you have a co-signer, you are subjecting them to the additional risk you are taking as well.

Relief options

Federal student loan borrowers can access generous relief options, including forgiveness programs, forbearance, and deferment. You may even qualify for discharge due to school closure, bankruptcy, disability, or death.

In contrast, private student loan forgiveness doesn’t exist. While lenders may offer forbearance and deferment programs, they’re typically less generous, and the terms can vary by lender. 

When to consider private student loans

Although federal student loans are usually the better choice between the two, it can make sense to research private loan options in the following situations:

• You’ve met your federal loan allotment: If you’ve maxed out your annual or aggregate federal loan limit and still have some costs remaining, you may have no other choice but to consider private loans. Before you do so, however, try to find scholarships and grants, which don’t require repayment.
• You have strong credit: If you’re in graduate school and have managed to build a strong credit history, you may be able to secure a lower interest rate on a private loan than what you’d pay for federal graduate loans.
• You’re a parent: Parents can use federal Parent PLUS loans to help their child pay for school. However, the interest rates for PLUS loans are the highest among federal loan options. What’s more, parents have access to fewer federal relief options and protections. If you can qualify for better terms on a private loan, it could make more sense in the long run.
• You’re an international student: You may be eligible for federal student loans if you meet one of the requirements for eligible noncitizens. If you don’t, however, some private lenders specialize in working with international students, making it easier to get the funding you need.  

To illustrate the potential benefits for students and parents with strong credit histories, the federal interest rate for the 2024-25 academic year is as much as 9.08% for graduate and professional students and parents. With top private lenders, however, rates can go as low as roughly 3.5%. 

If you need private student loans, consider a lender like College Ave. It offers a variety of loan options for different needs, doesn’t require half-time enrollment with most loans, and provides multi-year approvals.

Should you choose federal or private loans first?

In most cases, it’s better to first exhaust your allotment of federal student loans. Then, if you still have educational expenses after tapping those resources, you can use private student loans to bridge the remaining gap, if necessary.

However, if you’re a graduate student or a parent with a solid credit history and income, it could make sense to shop around and compare private student loan rates and terms to determine which option is better suited for you and your needs. 

Before you apply for student loans of any kind, however, it’s important to research and evaluate all of your options for funding your college education. Scholarships, grants, and working a part-time job can help you minimize your need to borrow money, resulting in less debt and lower payments after you graduate. 

In my experience, it is not common for borrowers to knowingly choose a private loan over a federal loan. More often than not, borrowers get private loans because they are left with no better options. 

That said, it does happen that someone has a lower total cost of paying off the loan if it were privately held vs. federally held. That depends on your loan repayment terms and interest rate. Do you have to pay interest and have a large amount of disposable income? Maybe a five-year private loan would be a good option.

I often recommend to parents with children with private student loans to get a nominal amount of insurance for their children. If their children pass away, the money for that loan will still be owed. Best to protect yourself from this (morbid) event.

FAQ

Can I refinance federal loans into private loans?

Yes, you can refinance federal loans into private loans, but it’s a decision that requires careful consideration. Refinancing involves taking out a private loan to pay off your federal loans, potentially lowering your interest rate if you qualify for better terms. 

However, once you refinance, your federal loans are no longer eligible for federal benefits. Refinancing is best for borrowers with stable incomes and excellent credit who don’t rely on federal protections and want to save money on interest.

Are private student loans better for graduate students?

Private student loans can be a good option for graduate students, but whether they’re “better” depends on your circumstances. Federal Direct Graduate PLUS Loans offer flexible repayment plans, loan forgiveness options, and no credit score requirement beyond having no adverse credit history. 

However, these loans can have higher interest rates than private loans. If a graduate student has strong credit or a creditworthy cosigner, private loans may provide lower interest rates and save money in the long term. Still, private loans lack the repayment flexibility and forgiveness programs that federal loans offer, which could be a deciding factor for many graduate students.

What happens if I default on a federal vs. private loan?

Defaulting on a federal loan has significant consequences but comes with more options for recovery. The federal government can garnish wages, seize tax refunds, or withhold Social Security benefits to collect the debt. 

However, you can rehabilitate your loan or consolidate it to regain eligibility for federal benefits. Federal loans also offer deferment and income-driven repayment plans to help borrowers avoid default in the first place.

Private loans, on the other hand, typically offer fewer options. If you default on a private loan, the lender can sue you, garnish wages (with a court order), or send the account to collections, which could damage your credit for years. 

Unlike federal loans, private lenders are less likely to offer rehabilitation programs, although some may provide hardship forbearance. It’s best to communicate with your lender at the first sign of financial difficulty.