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

Learn the difference between federal and private loans. Decide which one is right for you.

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by Genevieve Carlton, Ph.D.

Published on June 13, 2022

Reviewed by R.J. Weiss

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Federal vs. Private Student Loans: What’s the Difference?
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More than 43 million Americans have student debt. But what are student loans? And what's the difference between federal and private student loans?

There are pros and cons to borrowing for college. And there are also pros and cons of each loan type. Federal loans offer some significant benefits over private loans. Borrowers with federal loans qualify for more repayment options. Federal loans also generally charge lower interest rates. But not every student qualifies for federal loans.

Our guide explains what you need to know when comparing private vs. federal student loans.

What Is a Private Student Loan?

A private student loan comes from a bank or other private lender. Like car loans, mortgages, and personal loans, borrowers must apply for a private student loan through the lender. Factors like your income, credit score, and credit history determine your eligibility and interest rate for your loan.

Unlike federal loans, private loans typically do not set a cap on the amount you can borrow. However, they also charge higher interest rates and offer fewer repayment options. Private borrowers also do not benefit from federal pauses on student loans or student loan cancellation. But some students do not qualify for federal loans, which limits their options.

What Is a Federal Student Loan?

The federal student aid program offers several types of student loans. Undergraduates who take out direct subsidized loans benefit from zero interest while in school and during the grace period. Compared to private loans, direct unsubsidized loans often offer lower interest rates and more repayment options. And direct PLUS loans let parents, graduate students, and professional students borrow for educational expenses.

Federal student loans do not generally require a credit check. They also offer a grace period, which means monthly payments do not start until six months after leaving school. Federal loans also offer multiple repayment plans and loan forgiveness programs.

What Is the Advantage of Federal Loans Over Private Loans?

Most borrowers should prioritize federal loans over private loans. What is the advantage of federal loans vs. private loans? This section walks through several key factors.

Lower Interest Rates

Lenders charge interest on student loans. And the student loan interest rate plays a large role in the total amount you'll repay over the life of the loan. For most borrowers, federal loans offer lower interest rates than private loans. That saves borrowers money as they repay the loan.

Undergraduates qualify for a 4.99% interest rate, while graduate and professional students pay 6.54-7.54% interest. Private loan interest rates range from 3-13% and offer both fixed and variable rate options. Most private borrowers rely on a student loan cosigner to qualify for lower interest rates. Borrowers who receive the best terms are most likely benefiting from a cosigner with an excellent credit history.

Better Repayment Options

Federal borrowers benefit from more options to repay their loans. The federal government offers several repayment plans. Borrowers can pay back their loans with the standard plan, which divides the loan plus interest into 120 equal payments.

The graduated repayment plan starts with lower monthly payments, which increase every two years. This accounts for the increased earning potential of college graduates.

Extended repayment options and consolidation allows borrowers to spread their payments over 25-30 years. And the federal government offers income-driven repayment plans that set monthly payments at a percentage of the borrower's income. The loan simulator lets borrowers see how different repayment plans affect their monthly payments.

Federal repayment options include:

The Possibility of Debt Relief

Since 2020, the federal government has offered a student loan moratorium for borrowers. That means a suspension of monthly payments and a 0% interest rate. This benefit does not extend to private loans.

In addition, federal loans offer the possibility of debt relief through loan cancellation. President Biden is currently considering student loan cancellations for qualifying borrowers. Like the pause on student loan payments, loan cancellations would only apply to federal loans. Private borrowers would not qualify for debt relief under a federal plan.

Borrowers cannot predict the future of debt relief or whether calls to lower or cancel interest on federal student loans might succeed. But federal loans still offer a greater chance of debt relief than private loans.

What Are Benefits of Privately Issued Student Loans?

What is one benefit of privately issued student loans? While many federal student loans cap the amount you can borrow, private loans offer higher limits. And private lenders offer loans to students who do not qualify for federal loans. International students, for instance, have few options outside of private loans.

In some cases, private loans help students when their parents refuse to provide information for the Free Application for Federal Student Aid (FAFSA). Before taking out private loans, however, consider other options for students whose parents withhold financial information. Independent students can submit a FAFSA without parental information.

Should You Get a Private or Federal Student Loan?

When deciding between federal vs. private student loans, you'll need to consider several factors. This section walks you through how to choose between the two types of loans.

Do You Qualify for Federal Student Loans?

Federal student loans are often considered the best form of repayment-required financial aid. That's because federal loans offer lower interest rates and more repayment options. But not every student qualifies for federal student loans.

Find out if you qualify by submitting the FAFSA. Make sure to exhaust all scholarship and grant options before taking out loans.

Some students do not qualify. For example, international students typically cannot take out federal loans. Neither can students attending unaccredited programs or those enrolled less than part time. Borrowers also need to show satisfactory academic progress to receive federal loans. If you aren't eligible, consider the following factors.

Do You Have a Cosigner?

A cosigner — like a parent — can help lower your private student loan interest rate. That's because private lenders consider your credit score, and most college students have little credit history. You can ask any trusted adult to cosign the loan, but keep in mind that they will be responsible for repayment if you default.

Can You Afford Your Student Loan?

Before taking out any type of student loan, consider whether you can repay it:

In addition, consider your earning potential after graduation. If your field typically offers lower starting salaries, avoid taking on large amounts of debt if possible. Research the median salary for graduates from your college to make a realistic budget with student loan payments. And look into ways to lower your borrowing, including scholarships and student income sources.

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