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

The cost of college is high, and it’s still on the rise. If you’re planning to go to college, you’ll probably need a student loan to pay for tuition, books, and other expenses. In fact, over half of the people who attended college in 2017 took out student loans, according to the Federal Reserve. 

If you think you’ll need a student loan for college, where do you turn? Do you consider federal student loans or private student loans, and what’s the difference between them? 

Before borrowing to pay for school, it’s important to know the difference between federal and private student loans. This guide will help.

In this guide:

• Federal vs private student loans: Key differences
• How federal loans work
• How private student loans work
• What should I do next?

Federal vs private student loans: Key differences

There are key differences between federal and private student loans, and it’s easy to get lost in the details. This table lays out the general differences between the two.

	Federal Student Loans	Private Student Loans
Undergrad interest rate	4.53%	Varies by lender
Fixed or variable rates	Fixed rate	Fixed and variable rates available, depending on the lender
Is a credit check required?	Not required for Direct Unsubsidized and Subsidized loans; required for Direct PLUS loans	Yes, a credit check is required for student and cosigner (if applicable)
How are loan amounts determined?	Financial need and maximum allowable limits	Cost of attendance
Are subsidized loans available?	Yes, based on need	No
Is loan forgiveness available?	Yes, if specific criteria are met	No
Are income-driven repayment plans available?	Yes	No
Is interest tax-deductible	Yes	Yes
Are there prepayment penalties?	$0	Varies by lender
Compare	Federal student loans	Best private student loans

How federal loans work

The U.S. Department of Education offers federal student loans to students and their parents to help pay for college. These loans come with a low, fixed interest rates and are distributed to eligible students based on their financial need.

How to get a federal loan

To apply for a federal student loan, start by filling out a Free Application for Federal Student Aid (FAFSA). After submitting it, you’ll be notified of what aid you qualify for, and what funds—subsidized and/or unsubsidized—you’re eligible to borrow.

Once you accept the loan offer, your loans will be disbursed directly to your school. You can use any remaining funds to cover additional education-related costs, such as books and housing. 

You won’t be required to make payments while in school, but interest will start accruing on any unsubsidized loans. Your loan repayment typically begins six months after you finish school or if you fall below half-time enrollment. 

You’ll repay the loan in fixed installments, but there are a few repayment programs to choose from that might change how you repay your loans. 

What are the benefits of federal student loans?

When you need a loan for school, federal student loans should be your first choice. They come with benefits that private loans don’t typically offer.

For example, federal loan rates are fixed and usually lower than what you’d get from a private lender. And you can qualify for funding even if you don’t have great credit.

There are also several benefits when it comes to repayment. These benefits include:

• Repayment options: Federal loans offer the ability to choose a different repayment plan, including the option to start out with smaller payments that gradually increase over time, to extend your loan repayment period for up to 25 years, or to make loan payments based on a percentage of your income. You can learn more about these programs and benefits in our guide to federal student loan repayment.
• Eligibility for public service loan forgiveness: Certain professions may be eligible to have their loan balance forgiven through the PSLF program if specific criteria are met.
• Deferment and forbearance: If you’re experiencing a difficult financial period, deferment and forbearance allow you to pause your loan payments, though interest may continue to accrue.

Types of federal student loans

There are several different federal student loan options available. Depending on how much you need to borrow and your circumstances, you may have one type or more:

• Direct Subsidized Loans: These are need-based loans for undergraduate students. The federal government pays the interest on the loan while you’re in school (at least half-time enrollment), during the six-month grace period, and during deferment or forbearance. You’ll be notified if you qualify for subsidized loans.
• Direct Unsubsidized Loans: Available to undergraduate, graduate, and professional students and aren’t need-based. Interest accrues while you’re in school and during any periods of deferment or forbearance. Read more: What’s the Difference Between Subsidized and Unsubsidized Student Loans?
• Direct PLUS Loans: Direct PLUS Loans are available to graduate and professional students and to parents of dependent undergraduates. Eligibility is not based on financial need.
• Direct Consolidation Loans: Federal Direct Consolidation Loans let you roll multiple eligible federal loans into one loan with one loan servicer.

How private student loans work

Federal loans have many benefits, but they don’t always cover the full cost of attendance. Many students also use private student loans to make up the difference. The Institute for College Access and Success found that 17% of the class of 2018’s debt was from private loans.

Banks, credit unions, and other private organizations issue private student loans. They don’t offer the same borrower protections as federal loans, like income-driven repayment plans and Public Service Loan Forgiveness. And interest rates are determined by the lender.

>> Read More: Can I transfer a private student loan to a federal loan?

How to get a private loan

You can apply for private loans on any given lender’s website. To determine if you’re eligible, the lender checks your credit history. If you don’t have good credit, you’ll need to apply with a cosigner, who will also undergo a credit check.

If you qualify, you may borrow up to the maximum loan amount, which is usually based on your school’s certified cost of attendance, less any other aid you’ve already received. 

Like federal loans, funds usually get disbursed directly to your school, and you can use any remaining money to pay related costs. Repayment typically begins six months after graduation or if you fall below half-time attendance. Interest will accrue while you’re in school.

Monthly payments are determined by your rate and your loan term, rather than income-driven repayment plans that federal loans offer. Depending on the lender, you may be able to put your payments on hold temporarily if you face financial hardship, but interest will continue to accrue.

What are the benefits of private student loans?

Private student loans have fewer benefits than federal loans, but the top advantage is that they provide funding when federal loans aren’t enough to pay for the cost of school.

Other benefits of private student loans include:

• Low interest rates: Eligibility for the loan is based on your creditworthiness. If you have excellent credit, you may qualify for a lower interest rate on your loan. But if you don’t have great credit, your loan may have a higher interest rate. 
• Cosigners can help: If you can’t qualify for a loan on your own, many lenders allow you to add a creditworthy cosigner to help you qualify and get a better loan rate.
• Fixed and variable interest rates: Depending on the lender, you might be able to choose between fixed and variable rates. Variable rates typically start lower, although they could cost you more over time.
• High loan limits: You can often borrow up to 100% of the school’s certified cost of attendance, less other aid. This is helpful when federal loans aren’t enough to cover the money that you need to attend school.

Here are some lenders to consider as you begin your search for a private student loan:

What should I do next?

If you think you’ll need to take out student loans to help you cover the cost of college, fill out the FAFSA and apply for federal loans first. Once you know what you can borrow with your federal loans, you can decide if you need to borrow more to attend school. 

If you need to borrow additional money from a private lender, first compare rates from a few different lenders to get prequalified quotes before choosing one. The guides below can help you do that.

• How to Apply for Student Loans
• Federal Student Loans Guide
• Best Private Student Loans
• Parent PLUS Loans vs. Private Student Loans