What’s the Difference Between Federal Student Loans and Private Student Loans?

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When researching student loans, you’ll find you have two main options: federal or private. In most cases, federal student loans have an advantage over private loans due to their low, fixed-interest rates and flexible terms. But private loans can be useful if you’ve hit your borrowing limits and need additional funds.

Before taking on any debt, it’s crucial to compare federal vs. private student loans so you understand all their similarities and differences, such as…

Federal vs. private student loans: What’s the difference?

So, what is the difference between federal and private loans? While both loans can help you pay for college or graduate school, you’ll find plenty of differences when it comes to borrowing limits, interest rates, repayment options and more.

Use the chart below to compare federal loans vs. private loans at a glance. Then read on to learn more details about the differences between federal and private student loans. (Note that the information in the chart was current as of the 2019-20 school year.)

Federal student loans Private student loans
Lender Federal government Banks, online lenders, credit unions or other private financial institutions
FAFSA required? Yes No
Cosigner required? No, unless you’re applying for a PLUS loan and have adverse credit. In this case, you’ll need to apply with an endorser. Likely yes. The borrower or cosigner must meet a lender’s requirements for credit and income.
Interest rate type Fixed Fixed or variable
Interest rates ● 5.05% for Direct undergraduate loans
● 6.6% for Direct graduate loans
● 7.08% for PLUS loans
Varies by lender. Borrowers with the best credit will get the lowest rates.
Origination fee ● 1.059% for Direct unsubsidized and subsidized loans
● 4.236% for Direct PLUS loans
Varies by lender, but many charge no origination fee
Borrowing limits ● $31,000 aggregate loan limit for Direct subsidized and unsubsidized loans for dependent students
● $138,500 for Direct subsidized and unsubsidized loans for graduate students
● Up to the cost of attendance of your school, minus any other financial aid already received, for parent PLUS or grad PLUS loans.
Usually up to the cost of attendance of your school, minus any other financial aid already received
Repayment plans ● Standard plan
● Income-driven repayment plans
● Extended repayment
● Graduated repayment
Terms will vary. You select your term when you borrow.
Grace period Yes, automatic for most borrowers, except for parent PLUS borrowers Usually yes, but check with your specific lender to make sure. Parent borrowers might be expected to start repayment immediately.
Forbearance and deferment options Yes Varies by lender
Eligible for federal forgiveness programs? Yes No
Eligible for Direct loan consolidation Yes No
Eligible for refinancing Yes Yes
Rules for default After 270 days of missed payments Varies by lender
Statute of limitations None Varies by state

Who issues federal loans vs. private loans

Federal student loans are issued and guaranteed by the Department of Education, while private student loans come from private lenders, such as banks, credit unions or online lenders.

You can apply for a federal loan by submitting a Free Application for Federal Student Aid (FAFSA) form. The Department of Education uses this to determine your expected family contribution toward your education and your financial aid award, including how much you’re eligible to borrow in Direct and/or PLUS loans.

Note that you’re not obligated to borrow your full award — you should only take out as much as you need to cover costs.

On the other hand, if you need more than your federal student loan offer, you might turn to a private lender for additional funds. These loans use their own applications, rather than relying on the FAFSA. You’ll apply directly with a private lender to take out a loan and will need to meet its requirements for credit and income (or apply with a cosigner who can).

Eligibility criteria

When comparing federal vs. private student loans, you’ll see that these loan types have different eligibility criteria.

Anyone who’s a U.S. citizen or eligible noncitizen can qualify for federal student loans, as long as they’re enrolled at least half-time in an approved degree or certificate program. Students with heavier financial needs may qualify for subsidized loans, while any student can borrow unsubsidized loans.

To get a private loan, on the other hand, you or your cosigner will need to meet a lender’s underwriting requirements for credit and income. Most undergraduate students apply with a cosigner, since they don’t usually have the credit history to qualify on their own.

As with federal student loans, you’ll need to be enrolled in a qualifying program to take out a private student loan.

Interest rates and fees

Another difference between federal and private student loans has to do with interest rates. Federal student loans come with fixed interest rates, which remain the same over the life of the loan. Private student loans, on the other hand, can have fixed or variable rates, and these can vary from one lender to another.

In the case of a variable-interest loan, your rate can fluctuate, changing your monthly repayment amount and increasing (or decreasing) the amount you pay in interest over the life of the loan.

Whether fixed or variable, the best rates will go to the applicants with the strongest credit or most creditworthy cosigners.

In addition, keep in mind that federal loans typically come with origination fees, while many private student loans do not. Make sure to account for that, since it might make the private offers a little more attractive than they would seem if you only look at the interest rates.

Still, even when accounting for origination fees, the federal loans usually offer the better deal — though not always. As you can see in the chart above, federal PLUS loans come with a relatively high rate and also have an origination fee, so it could be worth checking with some private lenders as well, just in case they have a better offer.

Borrowing limits

In many cases, the Department of Education limits how much you can borrow in federal student loans, but many private lenders essentially have no limit. Most will let you borrow up to the cost of attendance of your school, minus any other financial aid you have already received.

So if you’ve bumped up against the limit of your federal student loans and need additional funds, you could turn to a private lender to fill in the gap.

That said, federal PLUS loans do let you borrow up to the cost of attendance of your school, though they carry higher rates than other federal loans.

Repayment plans

Your options for repayment plans are different for federal vs. private student loans. Federal student loans come with a number of flexible repayment plans, including income-driven repayment and extended repayment. If you’re struggling to afford your monthly student loan bills, these alternative repayment plans can be a huge help.

Private lenders, on the other hand, typically aren’t so flexible. You usually choose your loan term when you borrow (10 years is standard), but you might not have many options for alternative arrangements once repayment starts.

That said, it’s always worth reaching out to your lender if you’re having trouble making payments: They should work with you to help you avoid default. You might also consider refinancing your loans, as this allows you to choose new repayment terms.

Grace period

Both federal and private student loans generally come with a grace period, which typically spans the entire time you’re enrolled in school (at least half-time) and then for another six months after you graduate.

One exception is the parent PLUS loan. If you want a deferment of payments while the student is in school, you’ll need to request it.

Private parent loans might also expect immediate repayment. Before you borrow, make sure to read the fine print to find out if your student loan comes with a grace period or if you’ll need to make payments right away.

Remember that even if a student loan is in a grace period, you can still make payments if you want to. Since interest accrues on all loan types — except for Direct subsidized loans — making in-school payments should save you money down the road.

Forbearance and deferment options

Federal student loans have forbearance and deferment protections which let you pause payments temporarily if you lose your job, go back to school or have another qualifying reason.

With private loans, meanwhile, any forbearance or deferment options are at the discretion of the lender. Before borrowing, find out if your lender will let you pause payments in the event you run into financial hardship.

Eligibility for forgiveness

As you would guess, only federal student loans are eligible for federal forgiveness programs, such as Public Service Loan Forgiveness or Teacher Loan Forgiveness. At the same time, your federal student loan balance can also be forgiven at the end of a 20- or 25-year term on an income-driven repayment plan.

By contrast, private student loans aren’t eligible for these federal forgiveness options. However, some states offer student loan repayment assistance programs that you might qualify for. Start by checking out our database of state programs, based on your location, profession or other factors.

Potential for consolidation or refinancing

Once you start repaying your student loans, you might look into strategies to simplify your debt or lower your interest rate. Your options will depend on the type of loan you have.

One way to combine multiple loans into one is through a Direct consolidation loan. Only federal loans can be consolidated in this way — private student loans aren’t eligible.

You can, however, refinance both federal and private student loans, which combines several loans into one and can come with a lower interest rate. However, note that refinancing federal student loans turns them private, meaning they’ll no longer be eligible for federal programs, such as the income-driven repayment plans or forgiveness programs mentioned above.

As a result, make sure the benefits outweigh any potential downsides before choosing to refinance federal student loans.

Consequences of default

Defaulting on your student loans is never a good idea, whether your loan originated federally or privately. However, borrowers do have a few more protections in place in case of default on a federal student loan:

  • Private student loan default rules vary, with some lenders marking a loan as in default after a few months of missed payments, and others considering it defaulted after a single missed payment. Federal loans, however, aren’t considered to be in default until 270 days of non-payment.
  • A private lender will begin to seek payment from any cosigners on the loan when payment is late; they do not have to wait until the primary borrower is in default. But with federal student loans — which don’t have cosigners — borrowers don’t have to worry about a servicer hounding their parent, grandparent or another benefactor who helped get the loan.
  • The lender may add collection charges to the amount the borrower owes, which can increase the loan balance by 25% to 40%.
  • While the federal government can garnish your wages without getting a court order, the amount they can take is limited to 15% of your disposable income. Private lenders need to get a court judgment against the borrower in order to garnish wages, but depending on the state, they may take as much as 25% of the borrower’s income.
  • Private loans have a statute of limitations, after which the debt can no longer be enforced. However, federal student loans have no statute of limitations, meaning the government could garnish your wages, tax refunds or even Social Security benefits indefinitely, until the debt is settled.

Is there an advantage of federal loans over private loans?

When it comes to federal vs. private student loans, most students should max out their federal loans before turning to private sources. This is because federal student loans tend to come with lower interest rates and more flexible repayment plans.

That said, it’s worth checking your rates with private lenders to see if you can get a better proposition elsewhere. Many internet-based lenders let you get preliminary offers online, with no impact on your credit score.

Before borrowing anything, it’s important that you understand how your loans work, as well as the difference between federal and private loans. By doing your research, you’ll know what to expect when repayment starts on your student loans.

Emily Guy Birken contributed to this article.

Need a student loan?

Here are our top student loan lenders of 2020!
LenderVariable APREligibility 
1.24% – 11.98%1Undergraduate, Graduate, and Parents

Visit College Ave

1.25% – 9.44%*,2Undergraduate and Graduate

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1.24% – 12.49%3Undergraduate and Graduate

Visit Discover

1.24% – 11.44%4Undergraduate, Graduate, and Parents

Visit Earnest

1.90% – 11.66%5Undergraduate and Graduate

Visit SoFi

2.72% – 13.00%6Undergraduate and Graduate

Visit Ascent

3.52% – 9.50%7Undergraduate and Graduate

Visit CommonBond

* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.

1 Important Disclosures for College Ave.

CollegeAve Disclosures

College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

  1. Rates shown are for the College Ave Undergraduate Loan product and include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
     
  2. This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. This informational repayment example uses typical loan terms for a first year graduate student borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7.10% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $141.66 while in the repayment period, for a total amount of payments of $16,699.21. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

Information advertised valid as of 7/1/2020. Variable interest rates may increase after consummation. Lowest advertised rates require selection of full principal and interest payments with the shortest available loan term.


2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

3 Important Disclosures for Discover.

Discover Disclosures

  1. Aggregate loan limits apply.
  2. Students who get at least a 3.0 GPA (or equivalent) qualify for a one-time cash reward on each new Discover undergraduate and graduate student loan. Reward redemption period is limited. Please visit DiscoverStudentLoans.com/Reward for any applicable reward terms and conditions.
  3. Lowest APRs shown are available for the most creditworthy applicants and include an interest-only repayment discount and Auto Debit Reward. The interest rate ranges represent the lowest and highest interest rates offered on Discover student loans, including undergraduate and graduate loans. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable margin percentage. For variable interest rate loans, the 3-Month LIBOR is 0.375% as of July 1, 2020. Discover Student Loans may adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Our lowest APR is only available to customers with the best credit and other factors. Your APR will be determined after you apply. It will be based on your credit history, which repayment option you choose and other factors, including your cosigner’s credit history (if applicable). Learn more about Discover Student Loans interest rates.
  4. Lowest APRs shown for Discover Student Loans are available for the most creditworthy applicants for the Discover Private Consolidation Loan and include an Auto Debit Reward. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable margin percentage. For variable interest rate loans, the 3-Month LIBOR is 0.375% as of July 1, 2020. Discover Student Loans may adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Our lowest APR is only available to customers with the best credit and other factors. Your APR will be determined after you apply. It will be based on your credit history, which repayment option you choose and other factors, including your cosigner’s credit history (if applicable). Learn more about Discover Student Loans interest rates.
Lowest APRs shown for Discover Student Loans are available for the most creditworthy applicants for undergraduate loans, and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.

4 Important Disclosures for Earnest.

Earnest Disclosures

  1. Rates include 0.25% Auto Pay Discount
     
  2. Explanation of Rates “With Autopay” (APD)
    Rates shown include 0.25% APR discount when client agrees to make monthly principal and interest payments by automatic electronic payment. Use of autopay is not required to receive an Earnest loan.

    Available Terms
    For Cosigned loans – 5, 7, 10, 12, 15 years. 
    Primary Only – 10, 12, 15 years

    In school deferred payment is not available in AL, AZ, CA, FL, MA, MD, MI, ND, NY, PA, and WA).


5 Important Disclosures for SoFi.

sofiDisclosures

UNDERGRADUATE LOANS: Fixed rates from 4.23% to 11.76% annual percentage rate (“APR”) (with autopay), variable rates from 1.90% to 11.66% APR (with autopay). GRADUATE LOANS: Fixed rates from 4.13% to 11.83% APR (with autopay), variable rates from 1.80% to 11.73% APR (with autopay). MBA AND LAW SCHOOL LOANS: Fixed rates from 4.11% to 11.81% APR (with autopay), variable rates from 1.78% to 11.72% APR (with autopay). PARENT LOANS: Fixed rates from 4.23% to 11.26% APR (with autopay), variable rates from 1.90% to 11.16% APR (with autopay). For variable rate loans, the variable interest rate is derived from the one-month LIBOR rate plus a margin and your APR may increase after origination if the LIBOR increases. Changes in the one-month LIBOR rate may cause your monthly payment to increase or decrease. Interest rates for variable rate loans are capped at 13.95%, unless required to be lower to comply with applicable law. Lowest rates are reserved for the most creditworthy borrowers. If approved for a loan, the interest rate offered will depend on your creditworthiness, the repayment option you select, the term and amount of the loan and other factors, and will be within the ranges of rates listed above. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. Information current as of 07/10/2020. Enrolling in autopay is not required to receive a loan from SoFi. SoFi Lending Corp., licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. NMLS #1121636 (www.nmlsconsumeraccess.org).


6 Important Disclosures for Ascent.

Ascent Disclosures

Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.

  1. Competitive variable rates calculated monthly at the time of loan approval based on a margin plus the 1-Month London Interbank Offered Rate (LIBOR) rounded to the nearest 1/100th of a percent. The current LIBOR is 0.176%, which may adjust monthly. Your interest rate may increase or decrease, based on LIBOR monthly changes. Rates are effective as of 08/01/2020 and reflect an Automatic Payment Discount. Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. (See Automatic Payment Discount Terms & Conditions.)
    1. Undergraduate Loans: Variable rate loans have an Annual Percentage (APR) range between 2.72% – 13.00%. Fixed rate loans have an APR range between 3.53% and 14.50% based on your credit worthiness and your selected program. Rates reflect an Automatic Payment Discount of 0.25% (for Credit-Based Loans) on the lowest offered rate and a 2.00% (for Undergraduate Future Income-Based Loans ) discount on the highest offered rate. (See Undergraduate Loan repayment examples.)
    2. Graduate Loans: Variable rate loans have an APR range between 5.33% and 11.42%. Fixed rate loans have an APR range between 6.14% and 11.92% based on your credit worthiness and your selected program. Rates reflect an Automatic Payment Discount of 0.25%. (See Graduate Loan repayment examples.)
  2. Payments may be deferred. Subject to lender discretion, forbearance and/or deferment options may be available for borrowers who are encountering financial distress.
  3. Making interest only or partial interest payments while in school will not reduce the principal balance of the loan. There are three (3) flexible in-school repayment options that include fully deferred, interest only and $25 minimum repayment. (See Undergraduate Loan repayment examples.)
  4. Flexible repayment plans may be offered up to a fifteen (15) year repayment term for a variable rate loan and ten (10) year repayment term for a fixed rate loan. Students must be enrolled at least half-time at an eligible school. Minimum loan amount is $2,000.
  5. Interest rate reduction of either 0.25% (for Credit-Based Loans) or 2.00% (for Undergraduate Future Income-Based Loans) applies only when the borrower and/or cosigner sign up for automatic payments and the payment amount is successfully deducted from the designated bank account each month. The amount of the discount is dependent upon the loan product and credit history of the borrower at the time of application. Interest rate reduction(s) will not apply during periods when no payment is due, including periods of in-school, deferment, grace or forbearance, unless a regular payment amount has been arranged with the servicer. If you have two (2) consecutive returned payments for Nonsufficient Funds, we may cancel your automatic debit enrollment and you will lose the interest rate reduction. You will then need to re-qualify and re-enroll in automatic debit payments to receive the interest rate reduction.(See Automatic Payment Discount Terms & Conditions.)
  6. All applicants (individual and cosigner) are required to complete a brief online financial literacy course as part of the application process to be eligible for funding.
  7. Eligibility, loan amount and other loan terms are dependent on several factors, which may include: loan product, other financial aid, creditworthiness, school, program, graduation date, major, cost of attendance and other factors. Aggregate loan limits may apply. The cost of attendance is determined and certified by the educational institution.
  8. The legal age for entering into contracts is eighteen (18) years of age in every state except Alabama where it is nineteen (19) years old, Nebraska where it is nineteen (19) years old (only for wards of the state), and Mississippi and Puerto Rico where it is twenty-one (21) years old.
  9. 1% Cash Back Graduation Reward subject to terms and conditions. Click here for details. In order to be eligible for the 1% Cash Back Graduation Reward, borrower must meet the following criteria after graduation:
    • The student borrower has graduated from the degree program that the loan was used to fund.
    • The student borrower may change majors and/or transfer to a different school, but must obtain the same level of degree (e.g. – undergraduate or graduate)
    • The graduation date is more than 90 days and less than five (5) years after the date of the loan’s first disbursement.
    • Any loan that the student has borrowed under the Ascent loan is not more than 30-days delinquent or in a default status as of the graduation date and until any Graduation Reward is paid.
  10. Students can apply to release their cosigner and continue with the loan in only their name after making the first 24 consecutive regularly scheduled full principal and interest payments on-time and meeting the other eligibility criteria to qualify for the loan without a cosigner.

* Application times vary depending on the applicant’s ability to supply the necessary information for submission.


7 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).

  1.  Rates are as of July 1, 2019 and include auto-pay discount. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment. Variable rates may increase after consummation.

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.